The Journey of Stablecoins: From Early Experiments to the Modern New Money

Stablecoins have become an integral part of digital finance. They are different from regular cryptocurrencies as they have the stability given by their value pegged to one of the fiat currencies. This makes stablecoins suitable for those with a low risk tolerance, and because of this, they have become an integral part of digital finance.

Now, there are many stablecoins, and their number is constantly rising. Stablecoins bridge a little the gap between fiat money and cryptocurrencies, which is why many people have started to buy USDC or USDT and take advantage of decentralized money.

Below, we will analyze the journey of stablecoins from the past to present times. Keep reading to learn more.

The Launch of Bitcoin

Even though this event might not seem to have anything to do with the presence of stablecoins, Bitcoin did pave the way for decentralized money. Bitcoin was launched in 2009, and it proved that it can offer something different from fiat money. At first, Bitcoin was worth almost nothing, but its price then skyrocketed in value and reached high prices that no one expected. This made the price of Bitcoin be known for its high volatility, where prices might change in a short time. So, Bitcoin became quite unsuitable for day-to-day payments because of this volatility, and it didn’t offer a good solution for those with a low risk tolerance.

Fiat-Backed Currencies Appeared

Tether (USDT) was born in 2014, and this is the moment when the first fiat-backed stablecoin made its way to the world. Tether was created to be backed 1:1 by reserves of the U.S. dollar. This stability is what made Tether attract attention from the audience. If other cryptocurrencies fluctuate periodically, the value of USDT remains steadier.

With USDT, investors can protect their portfolios from market volatility and avoid the conversion costs associated with traditional currencies. So, USDT is widely used for cross-border transactions for those who don’t want to rely on centralized solutions. Tether operates on various blockchains, including Solana and Ethereum, and for this approach, Tether is widely accessible.

More Stablecoins, Including USDC, Emerged in the Market

Since stablecoins attracted more and more attention from the public, stablecoins started to emerge on the market. One of them was USDC, which was launched in 2018 by Circle. The aim of the coin was to serve as an instrument for institutions and companies that needed a high degree of certainty.

USDC is backed again by the US dollar, which offers it better stability. Tether dealt with some problems regarding transparency, and Tether wanted to solve these issues. As a result, Circle decided to publish monthly reports and improve its audits, so the reserves will be in line with the token in circulation.

Exploring Various Types of Stablecoins

Fiat-Backed Stablecoins

The fiat-backed stablecoins maintain their value pegged to fiat currencies like EUR and USD. The fiat-backed stablecoins are backed by off-chain reserves, which are held outside the blockchain, in custodians and banks. This works for the stablecoins in circulation; the issuer holds the assets to be in line with their value.

This approach is taken so that stablecoins will resemble digital money and respect regulation. In the USA, they need to respect the Genius Act, and in Europe, they need to respect the MiCA regulations.

Crypto-Backed Stablecoins

There exist crypto-backed stablecoins as well, where other cryptocurrencies are kept as a safety deposit and kept as collateral. The collateral kept is usually higher than the issued stablecoin, and this approach is taken to absorb price swings and ensure the system remains verifiable and transparent.

Since, the backing assets are still cryptocurrencies, so volatile assets, they continue to require high risk management, where the price movements can increase the operational complexity and trigger liquidation.

Algorithmic Stablecoins

Instead of being backed by reserves, algorithmic stablecoins have taken a different path, and they use the supply and demand algorithm. This approach is what keeps prices stable. This model bears a certain level of risk since there is not a particular asset to anchor the value, and the result is that you need to be confident in the approach and trust the other participants.

TerraUSD (UST) is a stablecoin that proved the vulnerability of this, and when the confidence in it got weak, and the mechanism wasn’t able to stabilize the asset, which led to its breakdown.

Commodity-Backed Stablecoins

The commodity-backed stablecoins are backed by physical assets, including gold, which offer them exposure to real assets. However, there is a difference with this type of asset, since they are seen more like digitized commodities rather than a means of payment. This happens because commodity prices are known for their fluctuation, and their liquidity is also low.

Why Did Stablecoins Rise So Much in Popularity?

The main advantage of stablecoins is that they offer a stable solution against all the other cryptocurrencies that exist on the market. Many resist investing in regular cryptocurrencies, particularly because of the high volatility they are associated with. And stablecoins offer them access to decentralized solutions without needing to deal with that high level of volatility.

As a result, stablecoins have become very popular, and they are used for various use cases. For instance, they are used for trading assets, especially since stablecoins can offer a better level of liquidity to decentralized finance and exchanges. They can also act as collateral in services like borrowing or lending. Or also act as a safe haven.

Then, stablecoins can be used for payments as well. The payments can occur between customers or businesses, offering a solution for everyone. Then, stablecoins are also great for transfers, removing the many disadvantages that were present in sending money internationally using fiat services.

Now, as you have seen above, there are numerous stablecoins at the moment, and since they have solved many issues, more will surely appear on the market.