Stablecoins race ahead: Fiat-backed crypto booming amid uncertainty
Stablecoins are taking over the crypto space with increased utility and circulation. What is prompting this growth, and is it a threat to the market?
Despite this year’s uncertainty that has plagued the global economy, 2020 will go down as the year of the stablecoins due to the digital sector’s tremendous growth, with new developments emerging across the board. While some attribute this growth to the booming interest in decentralized finance among crypto enthusiasts, others see it as a bullish trend that confirms the inflow of fiat currency to the crypto ecosystem.
As the DeFi sector keeps growing, so too does the popularity of stablecoins, used to gain high returns from various decentralized lending projects. Stablecoins are also useful for their ability to bridge the gap between fiat currencies and digital assets. Stablecoins started off the year on a high note, as their cumulative transactional volume surpassed the $90 billion mark in a financial quarter for the first time ever. Although Tether (USDT) still holds the lion’s share of the stablecoin market, Dai and USDC indeed saw growth during 2020.
From conception of the first stablecoin in 2012 with the proposal of the Mastercoin project as a way of tying cryptocurrencies to traditional assets to mitigate price volatility, developers have grown accustomed to using the U.S. dollar as a go-to stable asset.
Currently, however, developers are experimenting with other stable assets such as gold, other fiat currencies and even cryptocurrencies. Here is an updated look on the current state of stablecoin adoption as a list of the top performing stablecoins in the market.
USD-pegged stable coins
Like every other stablecoin, Tether was designed to enable investors to store profit from crypto trading on a dollar-pegged cryptocurrency. To quote the website: “Every Tether is always backed 1-to-1, by traditional currency held in our reserves.” This means that for every USDT coin, there is an equivalent $1 in the company’s reserve. Currently, Tether is the most popular stablecoin, with a market capitalization of over $15 billion and a daily trading volume exceeding $40 billion, according to Coinmarketcap.
Despite claims by Tether’s issuing company that the tokens are 100% backed by liquid reserves, in the past, numerous parties have raised doubts about the company’s claims. But controversy aside, the number of USDT in circulation has recently increased from slightly over $4 billion in circulation at the start of 2020 to a whopping $15 billion. Most experts believe that DeFi has been a huge contributor to the mass-minting of USDT.
Furthermore, the rapid growth of USDT’s dominance has seen the coin overtake giants payment platforms like Bitcoin and PayPal in terms of average daily transfer value, at over $3.5 billion. With its increased popularity, Tether now plans to migrate a majority of its supply to faster networks, as the Ethereum network continues to experience increased gas fees.
USD Coin (USDC)
Issued by Circle, a blockchain-centric financial services provider, USD Coin was launched in 2018 as a stablecoin pegged to the U.S. dollar on a 1:1 ratio. In terms of the stablecoin’s transparency, Circle claims on its website that USDC reserves are monthly audited and published for the public by top accounting services.
Like Tether, USDC has seen rapid growth, with an increased circulation above $1.8 billion in the past six months. Just recently, Centre (a consortium founded by Circle and Coinbase for the development of management of USDC) announced the expansion of USDC from Ethereum to additional blockchains. The move is set to ensure that USDC remains flexible enough for large-scale financial innovations emerging among DeFi projects.
Paxos Standard (PAX)
According to its website, Paxos, the company behind the PAX Standard stablecoin, says that its stablecoin is the most liquid and well-regulated in the world. With its listing in over 150 exchanges, PAX boasts of over $100 million in daily trade volume and a total of $2 billion minted PAX coins in circulation.
Like its peers, PAX is packaged as a digital dollar that can be used to move money swiftly across the globe and at any time. The stablecoin is built on Ethereum’s ERC-20 protocol, and customer’s funds are held in segregated accounts insured by the Federal Deposit Insurance Corporation.
Launched via a partnership between one of the biggest crypto exchanges and Paxos, Binance USD (BUSD) is a stablecoin pegged to the U.S. dollar. The stablecoin has so far received approval from the New York State Department of Financial Services. This allows other financial institutions in the NewYork area to custody BUSD without needing prior custody licenses from the NYDFS.
In a race toward establishing itself as the go-to stablecoin for DeFi applications, Binance USD just recently launched on Dapper Labs’ Flow blockchain. Through its partnership with Dapper Labs — the team that pioneered crypto games such as Crypto Kitties — Binance USD is expected to open doors for developers looking to build stablecoin-powered DeFi applications. The BUSD is also quite popular on the Binance Smart Chain, which is a smart contract-enabled blockchain designed to accelerate the development of DeFi protocols.
Thanks to Binance’s market dominance, BUSD has had one of the most explosive growth rates, with a market cap that grew from about 20 million at the start of the year to its current mark above $500 million.
While Tether is criticized for its centralized management and lack of transparency, TrueUSD claims to do the very opposite. TrueUSD is a USD-pegged stablecoin based on the TrustToken Platform, and claims to run on a transparent ethical code that provides the public with real-time proof of funds stored in an escrowed bank account.
Not even the TrueUSD team has access to the escrow account, as in place of a managing team, smart contracts are put in place to help maintain the peg between the U.S. dollar and the TUSD coin at 1:1.
In March last year, TrustToken partnered with an accounting firm to develop a dashboard that enables third parties to view TUSD in circulation with the collateralized fiat funds.
Apart from TrueUSD, the TrustToken platform is also home to stablecoins backed by other national currencies including the British pound, the Australian dollar, the Canadian dollar and the Hong Kong dollar. All of them were launched in 2019 and are mostly actively traded on Uniswap, a decentralized exchange that hosts a variety of DeFi protocols.
Part two: Projects pegged to other national currencies
On Oct. 5, Xfers, a Singapore-based payment company, launched a Singapore dollar-pegged XSGD stablecoin. As the first Singaporean dollar-denominated token, XSDG creators expect that the coin will provide both businesses and individuals a means of exposure to the crypto industry.
To ensure easy access, the token can freely be withdrawn and transacted, even with noncustodial wallets. Also, given that the stablecoin claims to be compliant with the Financial Action Task Force’s travel rule, financial institutions can use it for cross-border money transfers as well. Like most stablecoins, the team behind XSGD is pushing for the token’s adoption within the DeFi ecosystem, with it currently being available on Ziliswap as an ERC-20 token.
While speaking to Cointelegraph, Aymeric Salley, who heads the project, said: “Now is the time for stablecoins pegged to other national currencies such as the Singapore Dollar to emerge.”
Saga, a U.K.-based blockchain company, has launched a stablecoin alternative to Facebook’s Libra in late 2019. Similar to Libra, SGA maintains its stable value by being tied to a basket of national currencies. What sets Saga apart from the Libra proposal is that the value of the SGA token is pegged to bank deposits in the International Monetary Fund’s special drawing rights. The IMF’s special drawing rights is a basket of assets that are heavily weighted in the U.S. dollar as well as the euro, Chinese yuan, British pound sterling and Japanese yen.
Additionally, unlike Libra, Saga will not profit from the stablecoin, although it will act as the primary issuer of the token. While speaking to CNBC, Saga’s founder Ido Sadeh Man said that the stablecoin’s objective is to act as a complementary currency for cross-border payments, in that consumers would use it to make a payment on ecommerce platforms such as Amazon. Due to its lack of regulatory clarity, Saga is currently unavailable in the U.S. and Israel.
Backed by the euro, the EURS stablecoin is issued by Stasis, a blockchain-related company that aims to tokenize traditional assets. The company claims that it pulls together various licensed financial intermediaries, including accounting firms and law firms, to ensure compliance and stability of its tokenized assets.
The EURS stablecoin was launched in June 2018. Built on Ethereum’s streamlined EIP-20 standard, EURS was pioneered as the first euro-backed stablecoin, and also boasts of providing continuous transparency through daily statements of its liquidity providers. So far, EURS has issued nearly 32 million coins, with a daily trading volume sitting slightly above the $1million mark.
Monerium is a fintech company founded in 2015 that hopes to simplify access to digital currencies. The company launched its first stablecoin in January 2019 after a $2 million seed round led by Crowberry Capital, with the participation of ConsenSys and Hof Holdings.
Monerium’s digital currency is designed such that the digital equivalent of major fiat currencies is issued to customers who can customize their currency basket. Monerium claims to be decentralizing finance by enabling open regulatory and technical standards to support its stablecoin. Currently, Monerium’s services are available across six countries: the U.K., Germany, Denmark, France, Lithuania and Sweden.
Can stablecoins outshine other currencies?
The reported increase in the overall supply of stablecoins has left many market watchers confused. If analytics from Coin Metrics are anything to go by, April 20 was the first time the number of stablecoin in circulation passed the $9 billion mark. Some analysts argue that the increased supply of stablecoins is a bullish signal as people hedge their positions. Others believe that it’s a bearish signal of people exiting the crypto space.
However, this growth in stablecoins comes at a time when various jurisdictions are also starting to warm up to the idea of creating their own stablecoins. As calls to tokenize traditional assets continue, newcomers into the stablecoin market, such as XSDG Stablecoin, are bound to become commonplace.
With increased volatility, more developers will keep an eye on the developments happening among stablecoins to create financial innovations that mitigate volatility. The question now is whether stablecoins like Tether will overshadow the utility of Bitcoin, Ethereum and other cryptocurrencies as cross border payment protocols, as well as the fiat currencies they are pegged to.