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Stablecoins: the non-volatile crypto-currencies

What if stablecoins were the answer to the drawbacks of crypto-currencies?

30/10/2022



In recent years, stablecoins have become an increasingly important part of the crypto-currency universe. With a price that most often replicates the face value of a fiat currency, stablecoins bring liquidity to the crypto market.



What is a stablecoin?


Stablecoins are, as their name suggests, stable crypto-currencies. Their mission is to represent another financial asset - such as the dollar (USD) or the euro (EUR) - on a blockchain.


The value of the most highly capitalized crypto-currencies, such as Bitcoin or Ether, can fluctuate by tens of points (%) in a single day. Other lesser-known ones, meanwhile, can experience movements of 100 or even 200% in just a few hours: this is a consequence of the law of supply and demand.

On the other hand, stablecoins are not independent crypto-assets like Bitcoin or Ether. They have a reference role that they provide thanks to a simple principle: for each unit of stablecoin available on the blockchain (for example: 1 USDC), there is a unit of the reference asset available in reality that can be exchanged (for example: 1 real USD).





Why were stablecoins created?


Since their emergence in 2014, the use of stablecoins has literally exploded. The total capitalization of this market recently surpassed the $120 billion mark.


Originally, stablecoins were created as a way for crypto investors to take refuge when the price of volatile crypto-currencies drops. To secure the value of their funds by cutting their losses quickly, it is indeed more attractive for them to sell their crypto against stablecoins and not against fiat currency. This has the advantage of a cheap and instant sale because stablecoins are, like all other crypto-currencies, based on blockchain technology.


Conversely, when an investor wants to take his profits, it will also be more interesting for him to sell his volatile crypto against stablecoins. This is especially the case for a country like France where capital gains are not taxable in the case of a conversion into stablecoins, unlike conversions into euros, which are subject to the flat tax.



How does a stablecoin maintain a stable price?


There are really two principles that ensure the stability of a stablecoin, depending on its type. Some stablecoins are issued by a company responsible for guaranteeing a 1:1 exchange with the physical asset to which the stablecoin is backed; others use automatic regulation, derived from the law of supply and demand.



Stablecoins backed by physical assets


This type of stablecoin is the simplest to understand: it involves the existence of a company that issues and is responsible for the stablecoin. Thus, for each stablecoin created, the issuing company must hold the equivalent in the form of a liquid physical asset - a dollar (USD) or a euro (EUR), for example - to be able to guarantee that a stablecoin can be exchanged for its physical equivalent at any time.


This form of stablecoin is the most common today. Among the stablecoins of this type we can mention the USDT from Tether and Bitfinex. This was the first stablecoin created and is still the most widely used asset with a total capitalization of $60 billion.


Other stablecoins use the same principle: Circle's USDC (backed by USD), Techteryx's TUSD (backed by USD), Stasis' EURS (backed by EUR)... Some are even backed by gold, like Paxos' PAX!

The major difference between the different stablecoins is the transparency and the regularity of the audits of the issuing companies (inspection of the reserves in physical assets).


Decentralized stablecoins (regulated by market laws)


The parity of this type of stablecoin to a physical asset is guaranteed by the law of supply and demand, regulated automatically by a central market.

The most obvious example is the DAI stablecoin. Issuers of DAI stablecoins lock in a certain amount of a volatile crypto-currency, Ether, via a central market.


Suppose the price of DAI stablecoin rises: the issuance of DAI against the blocking of Ether will then be increased by the central algorithm, thus responding to the increase in demand with an increase in supply. Conversely, if the price of the DAI stablecoin falls, the issuance will be penalized and will respond to the decrease in demand, by a decrease in supply.


Other stablecoins are based on similar supply-demand principles, such as Jarvis Network's jEUR.



What are the use cases for stablecoins?


With the advent of Decentralized Finance (DeFi) since 2019, stablecoins are brought to the forefront. Decentralized applications (Dapps) rely heavily on stablecoins to be able to offer the financial services that can be found in our traditional banks. They are essential to the adoption of this ecosystem. As an example, stablecoins are the reference crypto-assets used as an alternative to the Livret A, in Decentralized Finance.


The same reasoning applies to merchants, who have always struggled to accept Bitcoin as a means of payment. Although they are convinced of its advantages and of the technology on which it is based, it is too volatile for them to ensure a healthy cash flow in the long term. Stablecoins are a solution for merchants who want to integrate crypto-currency payments.



What future for stablecoins?


Les stablecoins ont réussi à prouver la solidité de leur concept et attirent ceux qui peuvent être effrayés par les soubresauts des cours des crypto-monnaies. Cependant, leur hégémonie risque d’être remise en question d’ici peu. A l’instar de la Chine qui a récemment mis en place son Yuan numérique (e-Yuan), les Monnaies Numériques de Banques Centrales (MNBC) sont en cours de développement. Leur objectif est de digitaliser l’argent liquide afin de remplacer la monnaie fiduciaire par les MNBC. Cependant, cela apporterait aux Banques Centrales un moyen supplémentaire de contrôle des populations…


Stablecoins have managed to prove the soundness of their concept and attract those who may be frightened by the ups and downs of crypto-currency prices. However, their hegemony is likely to be challenged before long. Following the example of China, which recently introduced its Digital Yuan (e-Yuan), Central Bank Digital Currencies (CBDCs) are being developed. Their objective is to digitize cash in order to replace fiat money with CBDCs. However, this would provide Central Banks with an additional means of controlling the population...

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