How Different Are Stablecoins From Other Cryptocurrencies?

Stablecoins are a subset of cryptocurrencies and rely on blockchain technology. However, unlike volatile cryptocurrencies like Bitcoin and Ethereum, stablecoins have their value pegged to another asset, which can be fiat currency, commodities like gold, or other cryptos. This gives stablecoins more stability, making them an ideal option for investors looking to dip their hands in crypto without the volatility. Here’s an overview of stablecoins and how they differ from other cryptocurrencies:

Definitions and Use Cases

Cryptocurrencies are digital currencies that use decentralized blockchain networks. The currencies aren’t backed by government guarantees or physical assets, so their value fluctuates based on basic supply and demand, macroeconomic factors, and market sentiment. Stablecoins also rely on decentralized blockchain networks. However, their value is pegged to fiats like the dollar or euro. Other stablecoins are pegged to gold and other commodities or cryptos. The main role of stablecoins is to hedge against the volatility of cryptocurrencies while leveraging the benefits of decentralized blockchain technology. Use cases of stablecoins aren’t much different from other cryptocurrencies. Owners can use them to purchase goods and services online, play casino games, trade, and more. 

When cryptocurrencies first emerged, they were mostly embraced by the gambling industry. Punters used them to explore slots, blackjack, roulette, poker, craps, and other casino games. Crypto also became a popular payment option for players looking to explore social casinos and online sweepstakes games. They’ve since become a permanent feature in most casinos, with some platforms offering exclusive crypto deposits. Gambling aside, cryptocurrencies and stablecoins are used to purchase goods from online stores like Microsoft, Amazon, Shopify, and more. They provide swift transactions and carry low fees. Blockchain technology offers enhanced security and anonymity. Stablecoins also help investors move funds faster between exchanges without the need for fiat conversions.

Types and Volatility

Cryptocurrencies are highly volatile and prices can rise or drop by thousands of dollars. The highest recorded gain within a day for BTC is $8,343, which is unimaginable for fiat. All cryptocurrencies operate on blockchain technology and their prices open and close at different values every day. Bitcoin is the first and most popular crypto, and it has forks like Bitcoin Cash and Bitcoin SV. Other types of crypto include Altcoins (Ethereum, Litecoin, Ripple), Privacy Coins (Monero, Dash, Zcash), Meme Coins (Dogecoin), and Utility Tokens (Binance Coin, Chainlink). Governments are also developing their unique blockchain-backed central bank digital currencies or CBDCs like the digital yuan and digital euro.

Stablecoins are backed by reserves of fiat currency, gold, and oil, making them more stable, hence their name. There are different types of stablecoins including fiat, crypto, algorithmic, and commodity-collateralized. Fiat-collateralized stablecoins include USDT, USDC, and TrueUSD, backed by reserves of fiat currency held in banks and other financial institutions. Commodity-backed stablecoins include Paxos Gold, backed by physical gold reserves. Crypto-collateralized stablecoins like DAI, backed by Ethereum-based assets, are pegged to other cryptocurrencies to absorb price fluctuation. Algorithmic stablecoins use smart contracts and algorithms to control supply and demand and reduce price fluctuations. TerraUSD was an example of algorithmic stablecoin but has since collapsed.

Regulation and Control

Cryptocurrencies and stablecoins are viewed and regulated differently. Stablecoins are linked to fiat currencies and play a crucial role in financial markets. The reserve backing, financial stability, and potential competition with government-issued fiat currencies raise concerns, which leads to additional scrutiny. Some regulators suggest that regulations should require stablecoin holders to hold equivalent fiat reserves to maintain transparency. Cryptocurrencies are also scrutinized for potential use in illegal activities like money laundering, tax evasion, and regulatory evasion. The regulatory landscape is still evolving, with lawmakers developing new frameworks to ensure a sustainable ecosystem where cryptocurrencies, stablecoins, fiat, and other financial assets can safely coexist.

Traditional cryptocurrencies, altcoins, and meme coins are fully decentralized and no particular entity or authority controls their supply or operation. Bitcoin uses the decentralized networks of miners and nodes to validate transactions within the ecosystem. Stablecoins backed by fiat also offer decentralization but feature a centralized component because of the specific entities managing issuance and reserves. Tether Limited and Circle control USDT and USDC, which counters the true spirit of decentralization. Users looking for fully decentralized stablecoins can invest in algorithmic options like DAI, which uses smart contracts governed by decentralized autonomous organizations. Such organizations don’t have central control systems, which reduces the risk of reserve mismanagement.

Key Takeaways and the Future of Stablecoins

Both cryptocurrencies and stablecoins have benefits and risks. Cryptocurrencies face price volatility, regulatory uncertainty, scalability issues, and security risks like hacks and fraud. Stablecoins resolve the volatility issue but come with centralization risks, reserve mismanagement, and de-pegging concerns like those seen with TerraUSD. Regulatory crackdowns also pose concerns as governments tighten oversight. 

Notwithstanding, such measures help to enhance transparency, consumer protection, and financial stability. Institutional adoption continues to grow, thanks to banks and corporations integrating stablecoins in their payments and settlements. Cross-chain compatibility and algorithmic stabilization are also extending the use cases of stablecoins. However, while the future seems promising, the introduction of CBDCs could ultimately dissolve the need for fiat-pegged cryptos.