What is a Stablecoin?

Unpacking a simple, yet powerful concept.
August 14, 2023
Photo by Giorgio Trovato on Unsplash

Previously, I covered tokenized money at a high level. However, with the recent buzz about stablecoins, especially with PayPal’s announcement, I thought it would be a good time to explain what a stablecoin is and why they are important.

If you know what Bitcoin is, then you understand what I mean when I say tokenized money. Unlike Bitcoin and cryptocurrency, which is basically floating according to market economics, stablecoins are a form of tokenized money that are backed by another asset class: treasuries, cash, commodities, bonds, etc.

This is important.

We learned a pretty big lesson as an industry when UST, the infamous algorithmic backed “stablecoin,” crashed. It wasn’t backed by hard assets, and once the market soured on it, we basically saw a bank run until it was no more. While the innovation is something to potentially strive for in the long-term, it’s a good reminder of the human side of technology, and general human behavior when it comes to money — this nut is yet to be cracked at scale.

Coming back to stablecoins backed by assets, there are three archetypes emerging:

  • Fiat-backed stablecoins: majority of popular ones are backed by the US dollar (cash, short-term treasuries, etc.)
  • Crypto-backed stablecoins: although not the most popular among majors, this is when you back the stablecoin with other cryptocurrency (e.g., MakerDAO model)
  • Commodity-backed stablecoins: niche use cases are popping around grain-backed, gold-backed, etc. type stablecoins

The important thing is that there are assets backing up this digital money. The assets that back this up is how this term got it’s name. Stable. If you have an equal backing, theoretically, the asset should be stable.

Now, you might be asking yourself — okay…, but why wouldn’t I just use the dollar I have versus this digital money?

Tokenized money is simply more extendible:

  • You can acquire/hold it without a bank account
  • You can use it anywhere, 24/7
  • You can transfer it for next to nothing
  • You can be rewarded for holding it
  • You can build products and services off-the-back of you owning it
  • You can’t have it taken away from you (depending on the stablecoin and its governance)

The combination of these make it attractive for cross-border payment/money transfer activity, facilitating trading, banking the unbanked, serving as a safe haven during crypto volatility, etc.

If you’re interested in stablecoins, take a look at the existing players like USDT, USDC, and DAI. Or, take a look at some of the newer entrants like FDUSD and PYUSD to learn how these roll out.

I believe we are just scratching the surface in the stablecoin wars. Tether (USDT) raked in $850 million in profits in Q2 2023 alone, while Circle (USDC) pulled in $779 million in the first two quarters. Stablecoin operator revenue is growing.

In addition, regulations were just released in Japan, and more to potentially follow in Hong Kong, UAE, USA, and more.

Keep an eye on highly regulated institutions and their emergence into this space as this world potentially becomes an easier place to navigate.


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Disclaimer: the content written in this article is solely for information purposes and does not convey financial advice. It is not intended to be a recommendation for stablecoins nor against, but rather an informational piece on the current state of stablecoins. Do your own research.

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