Key Highlights:
- Stablecoins are cryptocurrencies that are pegged to real-world assets.
- Stablecoins are used for payments, remittances, trading and protecting funds when there is market volatility in the market.
- The stablecoin market is speeding up quickly and it is being projected that the usage of stablecoins in the future is going to expand.
Stablecoins have been making headlines everywhere lately. Their usage in day-to-day life has increased and due to this they are seen as one of those crypto innovations that could go big in the future. Industry leaders also think that these stablecoins have the ability to reshape parts of the global financial system over time.
However, before we move ahead to understand how stablecoins matter so much, let’s understand a more basic question, which is, what exactly are these stablecoins?
Stablecoins are cryptocurrencies that are designed to maintain a stable value. These cryptocurrencies are pegged or pinned to real-world assets like the US dollar. As these cryptocurrencies are pegged to US dollars, they do not experience price swings within hours and they stay close to a fixed price which is typically $1.
Types include fiat-collateralized (like USDT, holding dollar reserves), crypto-collateralized (over-collateralized by volatile assets like ETH), commodity-backed (gold-pegged like PAXG), and algorithmic (supply-adjusting via smart contracts).
As their price does not swing, they become a more practical and favorable option for everyday use, whether if it is for sending money across borders, parking funds during market volatility or for setting trades on crypto exchanges.
There are many ways where stablecoins act as a bridge between traditional finance and the crypto ecosystem. They combine the price stability people expect from fiat currencies with the speed, accessibility and programmability of blockchain-based systems. Through these years, stablecoins have evolved from simple trading tools into a critical layer of crypto infrastructure.
Maintaining Stability
In order to understand how these stablecoins are pegged and backed, Fiat-backed stablecoins are the easiest to understand.
These Fiat-backed stablecoins are linked to the US dollar by keeping real money or dollar-like assets such as cash or short-term US government bonds, in reserve. For every 1 stablecoin issued, the company behind it says it holds $1 worth of these assets. This is because users can redeem the stablecoin for real dollars at a 1:1 rate, the market treats the token as being worth $1. Examples include USDT, USDC, BUSD.
Crypto-backed stablecoins however work a little differently. These stablecoins are backed by other cryptocurrencies and not by cash. However, we all know that crypto prices can be unstable, the system requires more value to be locked up than the stablecoin issued. The reason behind this is, if the value of this back falls too much, the system automatically sells some of the crypto to protect the stablecoin’s $1 value. Examples include DAI and LUSD.
Algorithmic stablecoins are stablecoins that try to keep $1 price without holding direct backing. They use software rules to increase or reduce the number of tokens in circulations based on demand. If the price goes above $1, tokens are removed from circulation. While this idea is innovative, it has proven to be riskier especially when the market conditions are difficult. Examples include UST, and FRAX.
The $1 price is mainly kept in place through behaviour of the market. When a stablecoin drops below $1, traders buy it for cheap, and expect it to return to $1. When it rises above $1, traders sell it, and it pushes the price back down. Issuers also help maintain stability by managing supply and showing proof that their reserves exist, which builds trust in the peg.
Why Understanding Stablecoins is Important?
In today’s world, it is important to understand stablecoins because they sit at the centre of the crypto ecosystem. They are not just used for trading but also for payments, remittances, savings, and moving money quickly across borders.
For many users, stablecoins are the first point of contact between traditional money and blockchain-based finance. As regulators, banks, and institutions increasingly pay attention to them, knowing how stablecoins work helps make sense of where the broader crypto market is headed.
This growing importance is also reflected in the numbers. Today, US dollar denominated stablecoins make up around 99% of the global stablecoin market. According to JP Morgan Global Research, the total stablecoin market has reached about $225 billion, which is about 7% of the $3 trillion crypto market.
According to Kenneth Worthington, a Broker, Asset Managers and Exchange at JP Morgan explained “The market cap of the basket of stablecoins we track ended June +2% higher month over month, sustaining seven consecutive months of positive market cap growth despite a more volatile crypto market year-to-date.”
Looking ahead, JP Morgan Global Research expects that there might be steady growth. The firm projects the stablecoin market could reach $500-$750 billion in the coming years.
“There are reports out there that say stablecoins could grow to $2 trillion by the end of 2028, which we believe is a little bit optimistic. A more realistic scenario is that the market could grow two to three times from where we are right now in the next couple of years, which is equivalent to $500 to $750 billion. Admittedly, this is just our best estimate,” Teresa Ho, head of U.S. Short Duration Strategy at J.P. Morgan said.
Conclusion
Stablecoins have become an important part of the crypto ecosystem as they offer stability to a market that is volatile. As the use of stablecoins grows and the adoption increases, it becomes imperative to understand how stablecoins work for anyone who is entering this space.
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