Rodrigo on Nostr: The Benefits and Risks of Stablecoins Stablecoins are a digital representation of ...

The Benefits and Risks of Stablecoins

Stablecoins are a digital representation of fiat currency which are used to move money cross-border, as cash equivalent by crypto traders and staked in various protocols to earn higher yields than in traditional banking. Stablecoins are the result of a very slow and contained fiat world and through their use, fiat scales to solve for speed and reach. If you take a Guatemalan Quetzal to Turkey, it will most likely be worthless; but if you take a stablecoin, there are higher chances that you will be able to convert it to Turkish Lira. If you were to send a wire transfer from Guatemala to Turkey, it would be extremely costly and time consuming- not to mention that it could be blocked. If instead you send stablecoins, they would be instantly received and could be converted for much cheaper to local currency.

There is another side to stablecoins that investors and everyday users need to be aware of:

- Their intrinsic value is based on the legacy financial system: Stablecoins derive their value from traditional financial assets such as treasuries, repurchase agreements, corporate bonds, cash, etc., all of which are subject to the persistent devaluation of the USD, which in turn transmit the devaluation to the stablecoins themselves.

- They can be censored: Stablecoin issuers have the power to block, censor and reverse transactions if they want or if mandated by a regulatory/court order. While this could be considered a good tool to fight illicit activities, this power could potentially be abused as well.

- Depegs: There have been several cases in the past where a stablecoin’s 1:1 peg is broken. In almost all cases the peg is restored, but this will continue to be a recurring phenomenon. Here are some examples:

USDC depegged from $1 to $0.86 when they announced that 8% of their overall funds backing the USDC token were held at Silicon Valley Bank, which failed in March 2023.

TerraUSD algorithmic stablecoin collapsed from $1 to $0.04 back in May 2022 and its market cap crashed from $41B as the Terra network lost all credibility of its high-yielding Anchor Protocol.

Tether has its history of trading at premiums and discounts throughout various exchanges as well. Some have been massive movements and others have been very small.

Stablecoins have had their role in onboarding more people into crypto and bitcoin but they also come with fine print. Investors and everyday users must be aware of the risks involved, especially in assets stating that their value is “pegged” to something else. Massive depegs can lead to holders losing part if not all of the value of the stablecoin if it never returns back parity; as was the case with TerraUSD.

On the other hand, bitcoin’s value is not pegged to anything else and even though it has experienced strong volatility, I foresee its price increasing and stabilizing into the future as a result of its gold-like, economic properties and its industrial use cases that can facilitate cross-border trade (more on this in the next post).