Stablecoins have risen to prominence due to their unique utility and unrivaled versatility among digital assets. The sector now boasts a market capitalization in excess of $125B. Understanding the dynamics of stablecoins allows traders to harness blockchain to its full potential, rather than rely solely on a centralized financial institution.
Stablecoins denote digital assets in the cryptocurrency market that are pegged to more stable assets. While stablecoins can represent a variety of assets such as precious metals or ether, they are typically used to represent fiat currency.
Most fiat-backed stablecoins are pegged to the US dollar, due to its positioning as the global reserve currency. Tether’s USDT, Circle’s USD Coin (USDC), and MakerDAO’s DAI comprise the three most popular stablecoins at present. These are all pegged to USD through various mechanisms, making them fiat-backed stablecoins, but crypto-backed stablecoins also exist.
USDT and USDC are centralized, fiat-collateralized stablecoins. This means that in theory, all USDC and USDT should be 1:1 redeemable for physical US dollars. Tether and Circle (the two major stablecoin issuers) hold reserves of cash or cash equivalents in order to ensure that their stablecoin crypto assets are fully backed.
While this structure works well, its centralized nature is not ideal in a decentralized space.
Thus, competitors such as DAI have emerged to offer decentralized stablecoin alternatives. Rather than being controlled by a single entity, DAI is governed by members of MakerDAO. MKR holders propose and vote on protocol decisions. DAI is fully collateralized by a basket of digital assets including USDC and ETH.
Some projects have gone a step further by developing algorithmic stablecoins. These stables aren’t backed by any assets. Rather, they maintain their dollar peg at a smart contract level by restricting and expanding supply.
Algorithmic stablecoins are highly experimental and should be considered with extreme caution. Once the peg is lost, it is very difficult for an algo stable to regain parity to the asset it represents. The collapse of Terra Luna and UST is a searing example of the dangers of algorithmic stablecoins. The protocol’s $40B market cap cratered to zero shortly after losing its peg.
Stablecoins offer vastly different utility than other cryptocurrencies. Their unique use cases have given rise to thriving sectors of blockchain technology.
Speculative digital currencies, such as Bitcoin and Ethereum, are highly volatile. In contrast, stablecoins maintain their value as they’re pegged to underlying assets such as cash.
Stablecoins thus provide investors with a safe place to store their capital. This is because the price volatility of the wider market does not affect them.
Stablecoins are also used to store value in times of economic uncertainty. Citizens of countries facing hyperinflation increasingly use stablecoins to protect their wealth.
Stablecoins harness the borderless nature of crypto to enable seamless international transfers. Using stablecoins to transact funds is far quicker and more affordable than conducting cross-border transactions via the traditional banking system.
Even in 2023, a traditional wire transfer can take up to a week to finalize. The same funds can be transferred anywhere in the world in a matter of minutes by using a stablecoin. Furthermore, a stablecoin transaction costs just a few dollars in gas, generally far less than the fees incurred in traditional banking.
These advantages provide a significant boost to the multibillion dollar remittance market. Over $600B is transacted annually in the form of remittances, as emigrants send money home to support their loved ones. The rapid finality and reduced fees offered by stablecoins make it far easier for people to send funds home. Users enjoy increased cost savings without having to deal with bank accounts.
Estimates suggest that more than 1.4 billion people remain unbanked globally. These individuals are restricted to using cash, thus excluding them from the wider economy and many financial services.
Given that smartphones are now ubiquitous, unbanked people can use stablecoins with only an internet connection. Fiat onramps are growing increasingly diverse, making it simpler than ever to deposit funds and trade them for stablecoins.
In addition to providing avenues for people to store and move their money seamlessly, stablecoins offer diverse investment opportunities.
Dollar-pegged stablecoins form the lifeblood of decentralized finance (DeFi). There are many ways that stables can be used in DeFi to earn passive income.
Users can stake stablecoins to a number of protocols in order to earn interest on their holdings. Additionally, holders can provide liquidity to decentralized exchanges in return for a share of fees. DeFi also boasts a thriving lending market for stablecoin holders. Holders can either borrow assets using their stables as collateral, or lend out their holdings to earn interest.
Origin Dollar (OUSD) offers a cutting edge platform for investors to put their stablecoins to work. OUSD is fully collateralized by leading stablecoins – USDT, USDC, and DAI. Users can deposit any of these reserve assets to mint OUSD.
Underlying reserve assets are allocated to various strategies in order to earn yield. This yield is disbursed directly to users’ wallets in proportion to their OUSD holdings with no staking required. Minted OUSD can be transacted freely like any other token. As a result, users don’t need to lock up their funds or manually stake in order to enjoy passive rewards.
In contrast to centralized stablecoins like USDT and USDC, users are empowered to vote on OUSD’s activity and treasury allocations. Staking Origin DeFi Governance (OGV) grants users voting and economic power in the form of veOGV. veOGV holders vote weekly on OUSD’s fund allocations.
Crucially, OUSD offers best-in-class security. The protocol has been rigorously audited by firms including OpenZeppelin and Certora. OUSD is only one of six digital assets to earn a AAA rating from industry leading coverage firm, InsurAce.
Origin Dollar’s groundbreaking mechanics illustrate the vast power of stablecoins. By promoting transparency and autonomy, users are empowered to take control of their funds. With innovative design, stablecoins like OUSD broaden opportunities and inclusion while retaining security and seamless usability.
As with any form of investing, there are no guarantees on return. However, stablecoins offer diverse opportunities that extend beyond crypto. Additionally, their price stability ensures that value is not impacted by crypto’s high volatility.
When it comes to cross-border transacting, stablecoins offer a formidable alternative to central banking.
That being said, it’s vital to do your own research before investing in any stablecoin. At present, algorithmic, uncollateralized stablecoins come with outsized risk. Conversely, fiat-collateralized stablecoins remain robust, despite their opaque nature.
Using stablecoins in DeFi can open the door to a world of financial opportunity. However, the space remains fraught with protocols that do not have users’ best interests at heart. Make sure to use a trusted platform such as OUSD when entering the realm of DeFi.
