It took nine years for the first stablecoin to appear in crypto. Three years after Ethereum launched the Frontier and nine years since Bitcoin was activated. Stablecoins are digital currencies that are issued by a private entity to track the performance of fiat.
Stablecoins are a Shield against Volatility and Conduits into Crypto
In crypto circles, stablecoins aim to minimize volatility. Since launch, leading digital assets like Bitcoin and Ethereum are known for their price swings.
Stablecoins were introduced for investors looking for a reliable shield whenever prices are dumping. Conversely, when prices are trending higher, traders can use stablecoins to invest in cryptocurrencies.
Since the first stablecoin, Tether (USDT), was introduced in February 2018, it has enjoyed a first-mover advantage.
Stablecoins are indispensable in Crypto and DeFi
According to The Stablecoin Index by Messari, USDT is the most valuable stablecoin with a market cap of $21.21 billion. With this valuation, it has flipped Ripple (XRP) to be the third most valuable digital currency.
Other popular stablecoins include USDC by Circle with a market cap of $3.61 billion and DAI that is algorithmically pegged to the track the USD. It has a market cap of $1.1 billion.
There are six categories of stablecoins, classified depending on the backing asset. Common types like USDT and USDC are backed by fiat currencies. As BTC PEERS also reported, Germany's Bankhaus von der Heydt (BVDH) has launched a Euro-backed stablecoin.
However, others like DAI and BitUSD are backed by cryptocurrencies. Some, like HelloGold, are backed by precious metals, while Reserve employs a hybrid model.
In a recent interview, Bohdan Prylepa, the CTO and co-founder of Prof-it Blockchain Ltd, said stablecoins are "indispensable" in crypto, providing what traders need.
"Stablecoins are an indispensable part of crypto and DeFi, especially. Traders yearn for stability without restrictions, and stablecoins like USDT, DAI, and USDC available in various platforms like Ethereum, Tron, and the Omni Network, provide exactly what they want."
Stablecoin On-Chain Volume Rose to Over $1 Trillion in 2020
His comments come when the cumulative on-chain volumes of stablecoins in 2020 rose to above $1 trillion for the first time.
Most of them were processed in Ethereum.
According to a report by the Block Research, Ethereum processed over $835 billion of all stablecoin volumes dominating Tron and the Omni Network, respectively.
In the early days of crypto, the Tether launched on the Omni Network. However, with demand from Ethereum-based dApps, they shifted. It is from Ethereum that billions of USDT have been minted in 2020 coinciding with the exponential rise of DeFi over the last 12 months.
DeFi represents a paradigm shift. By building "Money Legos" and mimicking traditional finance instruments like banking and derivatives, the sub-sector has been successful in 2020.
DeFi Could Play a Role in Reducing Systemic Risk
For their success, the chairperson of the United States Commodity Trading Futures Commission (CFTC), Heath Tarbert, said DeFi is "revolutionary."
He added that it could "potentially even reduce systemic risk in some ways because we don't have the finance system concentrated in these large globally, systemically important institutions."
In Bohdan's view, DeFi is still experimental. Their crazy APRs and exploits, he explains, may slow down their role in being a tool of reducing "systemic risk":
"DeFi is still experimental. With crazy APRs and heists sending chills down investors, it may be years before this happens. Even so, DeFi is interesting but we shouldn't get ahead of ourselves. It is still the Wild West, and more work—structural, legislation, and infrastructure, needs to be done before DeFi plays a crucial part in steadying the global economy."
The STABLE Act Proposal
In 2021--depending on ETH prices, the TVL locked in most DeFi protocols could increase. The recent expansion of Ethereum prices has been pinned to DeFi. There is a direct correlation between the ETH price and the number of assets under management in different DeFi protocols.
On the other hand, there are claims that USDT is being used to manipulate Bitcoin prices in 2018. The New York Office of the Attorney General (NYAOG), lodging a case against iFinex, the parent company of Tether Limited.
In early December 2020, the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act bill was proposed to regulate stablecoin and its issuing. If passed, it will require issuers to be chartered like a bank, register with the Federal Reserve, and hold the required minimum Federal Deposit Insurance Corporation reserves.