Stablecoins vs Traditional Cryptocurrencies
Although traditional cryptocurrencies have a fixed supply, their demand varies depending on market sentiment, utility in decentralized finance (DeFi), regulatory environments, and other factors. As demand and trading activities change, their price is subject to fluctuations. In contrast, stablecoins are pegged to real-world assets like fiat currency, or other algorithmic strategies are employed to maintain stable value regardless of their current demand. This makes stablecoins very useful particularly for making payments and for storing value as a hedge against fiat inflation. The question arises: can stablecoins replace fiat currencies?
While it is true that algorithmic stablecoins do not rely on fiat currencies for value stabilization, they have limitations and may not fully replace fiat currencies. However, they are very useful in certain situations. For example, traders can store value in stablecoins instead of fiat currencies to hedge against volatility of traditional cryptocurrencies. Just like traditional cryptocurrencies, stablecoins also face regulatory scrutiny and are not recognized as a legal tender in most regions.
Stablecoins: A Hedge Against Inflation
Stablecoins pegged to the US dollar can be used to hedge against the inflation of other fiat currencies, such as the EUR, CAD, JPY, and many others. By holding USD-backed stablecoins, users may preserve their purchasing power when their local currency experiences devaluation. Some investors also explore algorithmic stablecoins, which use mechanisms other than direct fiat reserves to maintain price stability. However, these stablecoins come with their own risks (smart contract vulnerabilities) and may not always maintain their value during periods of market stress.
As cryptocurrency adoption continues to grow worldwide, stablecoins are becoming an increasingly important part of the digital asset ecosystem. Their price stability makes them useful for a wide range of applications, including crypto payments, trading, savings, and decentralized finance (DeFi). Below are five practical applications of stablecoins in modern finance.
Stablecoin Use Cases in Modern Finance
1. Crypto Payments
According to a report by Crypto.com, the number of global cryptocurrency owners increased by 34% in 2023, rising from 432 million in January 2023 to 580 million in December 2023. Crypto adoption is expected to keep increasing at substantial rate as more and more people view cryptocurrency as valuable assets. In response to growing adoption of crypto, many businesses are now integrating crypto payment systems.
Several companies and online platforms, such as Shopify merchants, Microsoft, and Travala, support cryptocurrency payments, including Bitcoin (BTC) and certain stablecoins. Many other merchants also accept payments in stablecoins through third-party payment processors. This approach provides customers with faster, more efficient, and lower-cost cross-border payment options.
2. Interest Earnings
Decentralized Autonomous Organizations (DAO) like Aave enable the creation of several liquidity pools, where lenders can deposit assets to provide funds for borrowers. Lenders can deposit stablecoins in these pools, and in return, they earn interest for providing assets. The loans provided to borrowers are collateralized, meaning lenders won’t lose their crypto if borrowers fail to repay.
While stablecoins typically offer less APR rate compared to more volatile assets, they can still be utilized on lending platforms similar to Aave to earn passive income. The APR rate depends on factors such as demand for borrowing a particular stablecoin, platform policies, platform fees and presence of additional rewards for lenders.
3. Trading
While stablecoins cannot be used as an investment asset because of their stable price, they can be used to store value when trading traditional cryptocurrencies. BTC/USDT is a popular trading pair that allows users to buy BTC by selling USDT coins. When users want to sell BTC, they acquire USDT in return. You can effectively store your money in the USDT stablecoin while trading BTC without utilizing fiat currencies.
Trading with stablecoins is a cheaper and faster option because there’s no need for a bank transfer to move money between crypto and fiat. By moving your assets to stablecoins, especially during market downturns of crypto like BTC or ETH, you protect your portfolio value from losses.
4. Decentralized Finance
The stable value of stablecoins makes them perfect for decentralized financial services such as lending, borrowing, liquidity mining, and yield farming. You can provide your stablecoin assets in liquidity pools to facilitate a DeFi protocol in several operations, including producing liquidity and providing funds for borrowers. Although stablecoins inherently offer a lower APR rate, the rewards you receive are more predictable because of their stable value.
Platforms like Yearn Finance offer several liquidity pools where users can deposit stablecoins and earn interest. Through the vault feature, which is an automated yield tool, you can deposit your assets and earn interest.
5. Hedge Against Inflation
Fiat-collateralized stablecoins such as Tether (USDT) may not provide full protection against fiat inflation because the USD can also devalue. Algorithmic and crypto-collateralized stablecoins are often considered better choices for protecting the value of your money against fiat inflation. Algorithmic stablecoins are designed to maintain stable value through algorithms and smart contracts that adjust the coin’s supply based on market conditions. On the other hand, crypto-collateralized stablecoins are backed by a reserve of other cryptocurrencies rather than fiat. However, algorithmic stablecoins also come with certain risks that are common to all DeFi protocols such as smart contract vulnerabilities.
Before investing in these stablecoins, it’s important to consider several risks. Crypto-collateralized stablecoins face risks related to market volatility and over-collateralization, while algorithmic stablecoins are vulnerable to stability issues and reliance on complex algorithms without physical collateral.
6. Cross-Border Remittances
Stablecoins are increasingly being used for cross-border remittances because they allow users to transfer value quickly and at a lower cost than many traditional money transfer services. Instead of relying on banks or remittance providers, users can send stablecoins directly to recipients anywhere in the world using a blockchain network. For this, users typically need a crypto wallet to send and receive stablecoins. Some platforms, such as Binance Pay, also facilitate crypto transfers between users within their ecosystem.
For example, a worker living abroad can send USDT or USDC to family members in another country within minutes. The recipient can then hold the stablecoins as a store of value, convert them to local currency through a crypto exchange, or use them for online payments where supported. Because stablecoins maintain a relatively stable value, they help reduce the exchange-rate volatility associated with traditional cryptocurrencies such as Bitcoin.
