Mary Amakihi 
Use Cases: Exploring Real-world Applications of Stablecoins
Stablecoins utilizes blockchain technology while avoiding the risks of cryptocurrencies. In this article, we explore some real-world applications of stablecoins.
Since Bitcoin and Ethereum launched, cryptocurrencies have taken the globe by storm. Although many crypto titans have invested in cryptocurrencies over the last decade, others are hesitant to put their money into crypto assets owing to the volatility risk.
This is where stablecoin comes into play. Stablecoins are digital assets that combine the best features of cryptocurrencies with the steadiness of FIAT currency.
As it has become necessary to find a solution to the excessive volatility of cryptocurrencies, entrepreneurs have begun investing in the construction of stablecoin, so they feel the need to employ a seasoned stablecoin development company.
You must rely on specialists if you need to learn how to establish a stablecoin easily.
However, before we go further, let’s get the basics.
What are Stablecoins?
Stablecoin is a cryptocurrency that always has the same price. These coins are designed to combat the volatile crypto market and provide a stable platform.
As a result, the cryptocurrency Stable Coin is critical for crypto investors, cryptocurrency exchanges, and the whole crypto industry.
Consider the Tether stablecoin as an example. Tether is backed by fiat money and can only be traded for $1. So you can see how Tether stablecoin can help offset cryptocurrency volatility.
There are a lot of stablecoins on the market right now. These cryptocurrencies are gradually gaining popularity and restoring public trust in digital currencies.
Although other initiatives have yet to achieve the same level of success as the popular ones, they are nonetheless running strong.
Even if you’re wondering why there are so many stablecoin projects when they all produce the same results, the truth is each stable token has its mechanisms.
Some of them use different protocols or approaches to keep the value stable.
Almost all stablecoins maintain some type of collateral and then regulate their supply to influence and stabilize the market.
A stable token backed by actual money keeps actual money in reserve and then ensures a redeemable currency in exchange for tokens.
The basic algorithms that underpin each coin may appear difficult, but the simple description would be “Holding a stable value in any case.”
Of What Importance Are Stablecoins?
It’s quite straightforward. Dealing with or circulating fiat money can be challenging in Bitcoin because of so-called fiat money limits and prohibitions.
This is why many crypto exchanges do not accept USD. As a result, it is becoming increasingly difficult for individuals who want to invest in cryptocurrencies with physical currency.
The steady currency can be a dependable substitute for dollars, allowing you to invest in other cryptocurrencies.
The theory is to emulate the nature of dollars by selling bitcoins for cash. This is how stablecoins function. The cryptocurrency market needs more liquidity.
On the other hand, a stable currencies list can supply the liquidity required for the crypto market. As a result, they are critical to the general expansion of digital currencies and global participation.
Now, let us look at the types of Stablecoins.
Types of Stablecoins
The types of stablecoins are;
- Commodity-backed stablecoins
- Cryptocurrency-backed stablecoins
- Algorithmic-backed stablecoins
Commodity-backed Stablecoins
The primary and most common technique is to back up each stablecoin in circulation with an equivalent value in fiat currency or cash equivalents. This is referred to as a fiat-backed stablecoin.
This means that for every stablecoin in circulation, the equivalent of one USD is held on reserve in the issuer’s U.S. bank accounts.
Independent accounting companies frequently examine these reserves monthly, and details on their holdings are widely displayed for public observation.
Cryptocurrency-backed Stablecoins
Another technique of keeping a stablecoin’s price stable is crypto-collateralization, which involves backing stablecoins with reserves of other cryptocurrencies.
However, because cryptocurrencies are so volatile compared to fiat currency, crypto-backed stablecoins are typically overcollateralized to help keep their peg amid market turbulence.
For example, MakerDAO’s Dai (DAI) stablecoin is collateralized at 150%, which means that every 1 DAI in circulation is backed by 1.5x its equal value in Ethereum (ETH) or other cryptocurrencies.
Algorithmic-backed Stablecoins
The third and last technique of keeping a stablecoin pegged is to utilize an algorithm, or smart contracts, which execute automatically to modify the circulating supply based on market conditions.
When the price of an algorithmically-backed cryptocurrency falls, the smart contract reduces the circulating supply to promote scarcity and, thus, value.
When a price rises over the peg, the smart contract raises the circulating supply to maintain price stability.
Exploring Real-World Applications of Stablecoins
Some real-world applications of stablecoins include;
- Payments
- On-ramps/Off-ramps
- Market liquidity
- Remittances
- Lending and staking
- Savings
Payments
Payments are one of the real-world applications of stablecoins. Stablecoins can help to speed up peer-to-peer transactions and payments.
Smart contracts can even automate microtransactions, decreasing the need for manual intervention.
Furthermore, stablecoins are highly liquid and may be readily exchanged for fiat via numerous exchange sites.
On the other hand, some customers utilize a crypto debit card with stablecoins to buy real-world things.
On-ramps/Off-ramps
Another real-world application of stablecoins is on-ramps/off-ramps.
On-ramps are venues for purchasing and entering the crypto ecosystem, while off-ramps are platforms for transferring digital currency back to money.
Stablecoins bridge traditional finance (TradFi) and decentralized finance (DeFi), easing the move into this new monetary system.
While any digital asset can be purchased with fiat currency, stablecoins are generally accepted since DeFi platforms and protocols are confident in their stability.
Market Liquidity
Still on the real-world applications of stablecoins, next is market liquidity. This frequent application of stablecoins is to provide liquidity to cryptocurrency dealers.
Stablecoins can be used as one of two currencies in an exchange trading pair. They allow traders to enter easily and exit trades without exposing their portfolios to unnecessary dangers.
Stablecoins enable traders to keep the value of their assets without having to off-ramp into fiat as they wait for the next big opportunity.
Stablecoins can also be exchanged abroad, opening up new global markets for players. As of March 31, 2023, the total trading volume for stablecoins had surpassed USD 22 billion globally.
This is a significant rise from the USD 364 million stablecoin trading volume at the end of 2018.
Remittances
Remittances are also one of the real-world applications of stablecoins. Stablecoins can be used for cross-border payments and remittances.
This eliminates the need for third-party institutions while also lowering the cost of exchange rates and transfer fees. On-chain verification processes reduce transaction times from days to minutes.
Stablecoins, when compared to other digital currencies, also reduce the risk of price volatility in remittances.
Lending and Staking
We would only exhaust our discussion on the real-world application of stablecoins by mentioning lending and staking.
As of February 2023, the top stablecoins, USDC, USDT, and DAI, had locked up roughly $24.5 billion in stablecoins.
Lending and staking give liquidity to exchanges, institutions, and, in some cases, people. Stablecoins such as USDT and USDC, unlike Ethereum, do not use the Proof-of-Stake consensus method.
Hence, staking on these platforms is more analogous to a money market deposit than anything else.
While these systems offer a higher APY than a savings account, the difference and disadvantage are in the lockup or “vesting” period, during which you cannot touch or transfer your crypto for a set time.
In effect, you trade off liquidity for the benefit of more significant rewards.
The total value locked (TVL) in stablecoin protocols is a simple way to demonstrate that more money is lent and staked in DeFi due to stablecoins.
After all, TVL refers to the entire value of assets vested for lending and borrowing. As of this writing, the top three assets by TVL are all stablecoins: USDT, USDC, and DAI.
Savings
Another one of the real-world applications of stablecoins worthy of note is savings. This underutilized yet widespread application of stablecoins is to store money as savings.
Stablecoins were developed to have a consistent value. Users can freely transfer money in and out of wallets, saving and spending when needed because there is no vesting or lock-in time.
Stablecoins can also be an alternative to a high-yield savings account for non-traders. According to the FDIC, the average interest rate on savings accounts is around 1.28%.
Stablecoins can pay up to 8% APY to compensate for the inherent risks of stablecoins de-pegging and losing value in the absence of insurance or government protection.
The Future of Stablecoins
Stablecoins are practical in these use cases because their intrinsic benefits (low transaction costs, fast payment, anonymity, and programmability) support the use cases that are now driving this technology’s adoption.
Stablecoins will most likely redefine how we hold currency and use money in the future.
While several of these applications may find widespread adoption within the next decade, central bank digital currencies, or CBDCs, are being proposed as an alternative to stablecoins.
CBDCs position themselves as stablecoin alternatives, addressing many of the concerns that stablecoins face, such as liquidity, operational risks, security, and regulatory challenges.
CBDCs will offer banks control over central bank-issued digital currencies. According to Finextra, 20% of central banks are interested in issuing a CBDC within the next decade.
While this push for digital money benefits the broader crypto market, it doubts the long-term viability of DAO-operated stablecoins.
Because CBDCs are widely accepted, traditional banks will control most stablecoin markets once laws exist. Compliance and legal functions could strengthen links for emerging players like Tether and Circle.
On the other hand, established banks have the infrastructure and a committed client base to support the push towards a cashless world.
They immediately require the technology, and CBDCs remain the most likely solution.
Final Thoughts
Stablecoins provide fast, transparent, private, and low-cost transactions, so cryptocurrency’s success depends on this technology’s widespread use.
The solution bridges the gap between TradFi and DeFi by delivering stability and reliability.
On the other hand, legislative and operational problems and the prospect of de-pegging will continue to plague stablecoin technology, making CBDCs appealing to governments.
