Blockchain technology has evolved rapidly in recent years. And amid all these changes, “stable coins” have emerged as a major user of this technology, both of which are part of Web3. These stablecoins are often linked 1-to-1 with other currencies, such as the U.S. dollar. Some people love them, others have their doubts.
Stablecoins were created in response to the volatility of traditional cryptocurrencies. By pegging their value to more stable assets, such as the U.S. Dollar, they offer a more reliable alternative for trading and temporary value storage in the digital space of web3.
What are Stablecoins?
These are coins that are digital currencies that get their value from other sources, such as traditional money. The main goal is to avoid the large price fluctuations typical of many other cryptocurrencies.
Types of Stablecoins and Technical Aspects.
There are several ways Stablecoins can work. Here we name the three most common.
Covered Stablecoins: Linked directly to traditional currencies with a 1:1 reserve, such as Tether (USDT) and USD Coin (USDC).
Crypto-covered Stablecoins: Supported by other cryptocurrencies. An example is DAI, supported in part by USDC, but also by part Ethereum and some other tokens.
Algorithmic Stablecoins: Use algorithms and smart contracts for stability, such as Ampleforth (AMPL).
Best-known Stablecoins and Their Distinction
Tether (USDT): The oldest and most widely used stablecoin.
USD Coin (USDC): Known for its transparency and regular audits.
DAI: Distinguished by its vision focused on decentralization.
The Role of Stablecoins in the Financial World
Stablecoins are a bridge between traditional finance and the world of digital currencies. They facilitate fast, low-cost cross-border transactions and often serve as a safe haven during market volatility.
Although stablecoins offer stability, there are risks such as reserve management, technical vulnerabilities and the risk of the underlying collateral. After all, the two largest and best known of these coins (USDC & USDT) are still managed by a central party.
With the growing popularity of DeFi platforms and the wider acceptance of cryptocurrencies, stablecoins are likely to play an even bigger role in the financial world. A notable development in this context is PayPal’s move into the world of blockchain. PayPal, one of the largest payment processors in the world, recently expressed its interest in the blockchain and crypto space. In addition to offering trading features for cryptocurrencies, PayPal has announced the launch of its own stablecoin. This move highlights the growing acceptance of Web3, even by traditional financial entities.
Stablecoins are an important part of Web3.. They offer unique advantages but also come with their own set of challenges. For anyone entering Web3, it is essential to understand these benefits and challenges.
What are the advantages of stablecoins?
They combine the advantages of cryptocurrencies with the stability of fiat currencies.
Are stablecoins really stable?
Generally, yes, but external factors can affect their value. This has also happened in the past. The biggest example of this is UST, part of the LUNA ecosystem.
How are stablecoins supported?
This varies by type, from fiat currency to other cryptocurrencies or algorithms.
What do regulators say about stablecoins?
Globally, there are mixed reactions, with some countries embracing them and others imposing stricter rules.
How is PayPal positioning itself in the world of stablecoins?
PayPal has announced the launch of its own stablecoin, highlighting their growing interest in the crypto space.