What are Stablecoins?

October 26, 2022

What are Stablecoins?

The evolution of stablecoins over the preceding year has been a phenomenal and game-changing advancement in payment technology. Dollar-pegged stablecoins that are backed by sufficiently secure and liquid collateral may be able to function as a virtual place of refuge when the cryptocurrency market is in turmoil. This is transforming the way we view digital currencies. 

Digital currencies known as stablecoins tie their value to an outside currency, usually the U.S. dollar (USD). Stablecoins are essential in the digital economy, and their development might lead to new ideas in other economic sectors. The cumulative circulating quantity of USD-pegged stablecoins on active public blockchains reached around $130 billion in September 2021, up more than 500% from the same month last year. This rise is the result of the USD-pegged stablecoins’ rapid adoption since the previous year.

Stablecoins are cryptocurrencies stored on distributed ledger technologies (DLTs), most often on blockchains. The vast bulk of stablecoins in circulation are tied to the U.S. dollar. However, stablecoins can also be linked to other fiat money, currency baskets, other cryptocurrencies, or physical goods like gold. On DLTs, stablecoins act as a store of value and a medium of exchange, allowing them to be traded or combined with other digital assets.

Four Types of Stablecoins

  1. Commodity-backed stablecoins are one of the most favored stablecoins. This kind of stablecoin is supported by valuable assets like gold, platinum, and property. The most widely used stablecoins are those backed by gold since gold often increases in value over time. Additionally, larger returns are provided by this kind of stablecoin.
  2. Fiat Collateralized stablecoins are backed by fiat currencies. Real-world currencies such as U.S. dollars, Euros, British pounds, and Canadian dollars are referred to as fiat currencies. These stablecoins have a 1:1 backing, meaning that one stablecoin will be equal to one unit of either the British pound or the US dollar.
  3. Algorithmic stablecoins are not backed by any fiat currency or commodity. The basis of algorithmic stablecoins is an algorithm. This kind of stablecoin requires modifications to the algorithm that regulates the supply and demand of stablecoins. The algorithm will adapt itself to issue more coins if the price of the stablecoin rises, and it will modify itself to sell off coins if the price of the stablecoin falls.
  4. Cryptocurrency-backed stablecoins are backed by other cryptocurrencies. An example could be $50 in bitcoins will be held in reserve for every $100 in crypto-backed stablecoin that is minted. Stablecoins backed by cryptocurrencies are more erratic than other types. With regard to interest rates, they experience irrational highs and lows. An illustration of a stablecoin backed by cryptocurrency is bitcoin (WBTC).

The Likely Potential of Stablecoins 

The robust use cases that are now driving the adoption of existing public and institutional stablecoins are supported by stablecoins’ distinguishing characteristics, namely their cryptographic security and programmability. The existing use cases, which are mostly limited to cryptocurrency exchanges, specific peer-to-peer payments, and institutional liquidity management by huge institutions, might be expanded by these characteristics, though. 

Future stablecoin technologies may see a variety of implementations and spur innovation in a number of growth sectors, including tokenized financial markets, more inclusive payment and financial systems, and the facilitation of microtransactions for emerging technologies like Web3.

Stablecoins have the ability to promote development and innovation in payment methods, enabling quicker and less expensive transactions. Stablecoins may decrease payment barriers and pressure current payment systems to offer better services since they can be used to instantly move payments peer-to-peer across digital wallets for potentially minimal costs. Cross-border transfers, which might need several days to process and have substantial costs, are especially essential in this regard. Low and medium-income nations, who rely on remittances for financial support, are burdened by these costs and delays.

Through the development of DeFi, which most likely needs stablecoins as a necessary component, stablecoins may help assist a more inclusive financial system. DeFi has faced some formidable obstacles, which include a difficult user interface, frequent hacking, protocol issues, and market manipulations. Almost all DeFi protocols also only permit the loan or selling of cryptocurrency or non-fungible tokens (NFTs). DeFi could promote a more inclusive financial system that enables investors to directly participate in markets without the need for intermediaries should the protocol’s current state of development be exceeded and it integrates with the larger financial market to support real-world economic activities. Stablecoin usage would probably increase as a result of this increase in DeFi.

Stablecoins have the potential to support next-generation innovations. Web3, an emerging promising approach away from centralized web platforms and data centers toward decentralized networks, is one instance of such an innovation. The emergence of effective, integrated online payment systems will enable internet services and social media platforms to transition their revenue sources from adverts to microtransactions. Instead of relying on advertising income and the sale of user data, one might envision a search engine or video streaming platform powered by almost instantaneous micropayments of the stablecoin. If this change in online services were to become widespread, stablecoin usage would likely increase.

The main drivers of stablecoin adoption at the moment are DeFi, restricted peer-to-peer payments, and cryptocurrency trading. The facilitation of more equitable payment and financial systems, the tokenization of financial markets, and potential next-generation developments like Web3 might all contribute to stablecoins’ potential future growth.

USDD’s Uniqueness

On May 5, 2022, H.E. Justin Sun, Founder of TRON, announced the launch of USDD through the TRON DAO Reserve (TDR) being the first over-collateralized decentralized stablecoin. A stablecoin’s capacity to remain stable is crucial to its success. Regulators need centralized stablecoins like USDC and USDT to maintain a 1:1 reserve ratio to the USD. The 1:1 USD peg of the centralized stablecoins may be lost if the centralized authority of these stablecoins are unable to satisfy their reserve obligations. Due to its decentralized structure, the USDD is resistant to these challenges. The USDD fluctuates around the USD rather than being completely pegged to it. Through monetary policies chosen by the TDR based on market conditions, the USD price stability is preserved.

Since its debut, USDD has continued to expand, supporting organic growth and aiming to progress the Stablecoin 3.0 era to make finance accessible to all. USDD, which has a total circulating supply of about 800 million, is the first over-collateralized decentralized stablecoin (OCDS), providing speedier transactions with the most important collateral ratio globally.

In comparison to DAI, which is regarded as the industry standard and has a guaranteed collateral ratio of 120%, USDD, one of the most secure decentralized stablecoins, has a guaranteed collateral ratio of at least 130%. On the TDR’s website, which is accessible to the general public 24/7, will list the real-time USDD collateral ratio, which currently stands at over 300% at the time of this writing.

The Potential of USDD

The introduction of USDD on TRON is both a simple step toward the creation of stablecoins based on TRON and a significant advancement for the industry in its pursuit of total financial independence. Making fair access to financial services a fundamental human right is the goal. Financial services will eventually be required and available to everyone. As its supply and user acceptance increase, USDD will pave the way for a new era of stablecoins and usher in the next phase of decentralization for the global blockchain sector.