3 use cases for stablecoins that explain popularity as crypto finds adoption
Stablecoins are turning the tide as crypto regains interest from broader circles and finds increasing adoption. In fact, stablecoins have always been considered a crucial part of making crypto go mainstream and being accepted worldwide with a range of use cases supporting that.
Stablecoins maintain mindshare of the crypto industry
Soon after the Bitcoin price tumbled from its all-time high at the end of 2017, and the ICO craze settled down, businesses and crypto traders braced for the cold snap as crypto winter set in. While the freeze is over now and the price of Bitcoin explores increasingly higher resistance levels, stablecoins have carried on all along. In fact, stablecoins have only grown in market share.
Currently, the top 3 stablecoins are all pegged to the US Dollar with Tether coming out on top with a market cap of $3.96B according to Stablecoin Index. That’s miles ahead of the runner up stablecoins: USD Coin at $384M and TrueUSD with a $220M market cap. Although, it should be noted that Tether’s peg is questionable at best with its USD reserves unproven and unaudited.
Stablecoins are like digital cash
Extreme price volatility has always been considered one of the greatest obstacles for the most popular cryptocurrencies such as Bitcoin, Ethereum and Litecoin. From the merchant’s side, the price volatility introduces too many cash flow risks while from the consumer’s side the dominating mindset is one of holding rather than spending.
Stablecoins, on the other hand, are different. They are a type of cryptocurrency that is more like cash, designed for spending. What makes them ‘stable’, is that the value of the coin is pegged to another asset. Here’s an example list of stablecoins and the assets they are pegged to:
Stablecoin/ Asset it is pegged to
- BitUSD / US Dollar
- Sparkdex.HKD / Hong Kong Dollar
- Stable.PHP/ Philippine Peso
- BitGold / Gold
The mechanism for maintaining the peg can be classified in two ways: trusted and trustless.
Trusted stablecoins – USD Coin for US Dollar
When a stablecoin is trusted, it means that a central authority controls the reserves and is in charge of maintaining the peg. USD Coin is a trusted stablecoin: the promise of a 1:1 ratio is made by a centralised organisation. That means you need to trust that organisation to keep its promise.
Trustless stablecoins – stable.PHP for Philippine Peso
The stable.PHP coin which is pegged to the value of the Philippine Peso is an example of a trustless stablecoin. The stablecoin was created on the Bitshares blockchain, and the pool of BitUSD to hold the peg is maintained by the blockchain using smart contracts.
At any point in time, you can exchange stable.PHP for the same value in US Dollars, represented by BitUSD - a trustless stablecoin on Bitshares which is backed up by BTS. More on the Philippine Peso stablecoin can be found here.
3 use cases for stablecoins: spending, trading and protection
Money made for spending
Stablecoins are widely considered to turn the tide by converting crypto holders into spenders. Acting as a form of digital cash, local currency stablecoins will support the next generation of payment systems used for everyday transactions and global commerce. It is simply much faster and efficient for making and processing transactions than any other system that currently exists.
As an example, in some areas in The Philippines, people can pay for their solar electricity bills using stable.PHP from the Bitspark mobile app.
Crypto made for trading
Stablecoins allow crypto traders to move easily between cryptocurrencies and fiat currency pairs, moving on- and off-board frequently at low costs. Traders do this for a number of reasons such as hedging exposure, seeking shelter in assets that are uncorrelated or turning a profit by finding unique market opportunities between emerging market currencies and cryptocurrencies.
As we continue to add more stablecoins pegged to emerging market currencies such as VND and IDR, advanced crypto traders will be able to capture those opportunities on the Sparkdex.
Protection for weaker currencies
For people that live in countries with weaker currencies, stablecoins provide a way out. They can be used to preserve wealth - preventing their savings from slowly dwindling - or in extreme cases, stop their savings from becoming completely worthless due to hyper-inflation.
In these scenarios, stablecoins pegged to stronger fiat currencies are a good way for people to park their savings elsewhere.
In most emerging markets, cash is a big part of the economy and daily life. As such, for people with vulnerable currencies to access stablecoins and other cryptocurrencies, there need to be cash-friendly services that they can use, such as our Cash Points network, where anyone can exchange cash for crypto and vice versa.