Stablecoins, such as USDT, USDC, and DAI, are becoming indispensable in both the crypto ecosystem and beyond.
From offering a safe haven during market turbulence to facilitating affordable remittances, their impact is profound, especially in developing countries grappling with currency volatility and hyperinflation.
But how exactly do stablecoins maintain their stability, and what risks do they face in the ever-evolving regulatory landscape?
Dive into this guide and explore the world of stablecoins to uncover their transformative potential and the challenges that lie ahead.
What are stablecoins?
Stablecoins are a class of cryptocurrencies designed to maintain a stable value by pegging their worth to a reserve of assets, such as fiat currencies, commodities, or other cryptocurrencies.
As such, the primary purpose of stablecoins is to combine the benefits of cryptocurrencies—such as decentralization, security, and ease of transfer—with the stability of traditional financial assets.
Which are the most popular stablecoins?
USDT (Tether), USDC (USD Coin), and DAI are among the most widely adopted stablecoins.
- USDT (Tether): Tether is one of the earliest and most popular stablecoins. It is pegged to the US dollar, with each Tether token (USDT) backed by an equivalent amount of USD in reserve. Tether is widely used in the crypto market for trading and arbitrage.
- USDC (USD Coin): Launched by Circle, USDC is a fully-backed US-dollar stablecoin. It is governed by the Centre Consortium and is known for its transparency and regulatory compliance. USDC is used extensively in the decentralized finance (DeFi) ecosystem and for cross-border transactions.
- DAI: DAI is a decentralized stablecoin created by MakerDAO. It is pegged to the US dollar but is collateralized by other cryptocurrencies, primarily Ethereum. DAI maintains its peg through a system of smart contracts, decentralized price feeds, and decentralized governance, making it a key player in the DeFi space.
What are some stablecoin use cases?
Stablecoins have found a wide range of applications in the real world.
Within crypto, stablecoins serve as a hedge against volatility. Traders and investors can quickly move their funds into stablecoins during periods of high volatility to preserve value, providing a safe harbor during market turbulence.
Currently, however, stablecoins are having a larger impact in developing countries.
Here, they mainly provide a hedge against local currency volatility and inflation. For instance, in countries such as Venezuela and Zimbabwe, where hyperinflation has severely devalued local currencies, individuals can preserve their wealth and protect their purchasing power by converting their money into stablecoins pegged to more stable currencies such as the US dollar.
Another use case is remittances. Traditional money transfer services often charge high fees and can take several days to process transactions. Stablecoins offer a faster and cheaper alternative, allowing migrant workers to send money back to their families fast and cheap.
Also, stablecoins enhance financial inclusion by providing access to global financial services via DeFi. In regions where banking services are limited or non-existent, stablecoins and DeFi protocols enable people to participate in savings, loans, and investments, offering previously inaccessible financial opportunities.
Do stablecoins have an impact on traditional finance?
Stablecoins are disrupting traditional financial systems in several ways.
Most importantly, stablecoins offer a new way to store and transfer value. In this context, faster and cheaper transactions in particular are challenging traditional banks and payment systems.
Additionally, stablecoins also provide a gateway to the DeFi ecosystem, where users can access financial services such as lending, borrowing, and earning interest without the need for traditional financial institutions.
Stablecoins are also being used to facilitate tokenized assets and securities, enabling fractional ownership and easier transfer of assets—making investment opportunities more accessible than traditional banks and financial service providers.
Tokenization involves creating a digital token on a blockchain that represents ownership of a real-world asset, such as real estate, stocks, bonds, or commodities. Stablecoins play a crucial role in this process by offering a stable medium of exchange that can be used to price these tokens. For example, a piece of real estate can be tokenized, and each token might represent a fractional ownership interest, priced in a stablecoin such as USDC or USDT.
What are the risks stablecoins face?
Despite their benefits, stablecoins are not without risks.
One of the primary issues is reserve transparency. For fiat-backed stablecoins such as USDT and USDC, it is essential to ensure that the issuing companies hold the appropriate USD reserves. Lack of transparency or false claims about reserves can undermine trust and lead to instability or depegging.
Smart contract security is another critical issue. Vulnerabilities in smart contracts can be exploited, leading to potential loss of funds. For example, hackers could exploit bugs in the code of DAI's underlying smart contracts, which might enable them to drain the collateral reserve—in which case DAI would lose its 1:1 USD peg.
Regulatory risks also loom. As stablecoins grow in popularity, regulators are increasingly scrutinizing their operations to ensure compliance with financial laws and regulations.
How to buy stablecoins with Phantom?
If you don't have a crypto wallet, here’s how to get started in less than five minutes.
- First, download Phantom. Then, create a new wallet.
- As soon as your wallet is set up, and you access it for the first time, you’ll be welcomed by a screen with two options:
- Buy crypto
- Transfer crypto
- Select “Buy Crypto” and then your preferred cryptocurrency
- Insert the amount you want to buy
- Select “Next”
- Choose your funding option: MoonPay, Coinbase Pay, etc.
- Finalize your order
Once you’ve completed your purchase, your crypto will appear in your wallet.
From there, you can swap into other tokens within the ecosystem. But before you do, take a moment to read our Solana tokens guide to learn all about them.
How to bridge tokens to Solana with Phantom?
If you already have a crypto wallet but this is your first time using Solana, you might have most of your assets on other blockchains, such as Ethereum and Polygon. With our Cross-Chain Swapper, you can bridge tokens across Ethereum, Solana, and Polygon right in your Phantom wallet. Here’s how:
Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
