Stablecoins are big news recently. UST blowing up has a lot to do with that. But stablecoins play an important role in the crypto economy. So today, we are going to take a look at why we have them, how we use them, and why or if we even need them.
Why Do We Need Stablecoins At All?
When you stake, you are often staking the native coin to that chain or app. So even when Cronos (the chain behind Crypto.com and built on Cosmos) offers staking, it’s for their coin CRO. It’s not for the native Cosmos coin: ATOM.
Apps and blockchains do this for a reason. They can say their coin has utility as a governance mechanism. In CRO’s case, the more you stake the more bonuses you are eligible for with their famous debit card program. The staking option means you have a chance to vote on proposals that affect the network. The community and network’s users should have a say in how it operates. This is known as governance.
How many coins/blockchains have real-world use cases right now, today? The truth is that many don’t.
It’s a running joke on crypto twitter that “crypto is a solution looking for a problem to solve.” Other than staking validators to validate network transactions, what real-world use cases are crypto coins and tokens solving today?
The answer is few. There are less than 50 out of the thousands of coins out there that provide real-world utility today aside from staking/governance and network fees. Now it sounds like I’m bearish on the industry when I say this but I’m not. But if we are being honest right now, most projects are still in the ‘hope to achieve’ stage. They are not in the ‘what we are already doing for X number of customers’ stage. That’s just the reality.
And we’ve seen the liquidity problems from UST along with funds and lenders that use stablecoins lead markets lower. Liquidity is a huge issue in the market. And projects can go from successful to the brink of bankruptcy in just a week or two.
Practical use cases, along with efficient and prudent management and operations, can protect great projects.
And THIS is why we need stablecoins. They already provide real world utility with a couple of practical use cases including at least two real world cases that help everyone, not just crypto investors.
Stablecoin Real World Use Case #1: Payments
The idea of a price-stable asset where any 2 entities or people can pay each other is something that makes sense to most of us. If the price of Bitcoin or Ether is bouncing around then how do you pay with it to be sure it’s fair for everyone? You can do it by agreeing to a price and or time to calculate the price for the transfer.
But why make it so difficult? A price stable asset just makes more sense. If you know the price is $1, then you can send $200 of that asset to settle a $200 bill. Simple. And simple is what we need if we want the rest of the world, the nocoiners, to adopt crypto. They need simple and easy to understand uses. And this is one.
Anyone who has ever used the SWIFT system for international wire transfers knows how it takes days to transfer with costs from the banks on both sides. That’s if you are fortunate enough to send from one Western country to another. Emerging market countries take even longer. Instead, with a stablecoin, when you pay you can:
- Pay whenever you want to not only during bankers’ hours.
- Eliminate exchange rate risk.
- Receive the money in less than 15 minutes, not days.
- A fraction of the cost of both international banks or faster money service businesses like Western Union. Pennies instead of hundreds of dollars or a % of the total.
- Send to whoever you want anywhere on Earth. No one can stop, refuse, or negate the transaction. While centrally issued coins like USDT or USDC can negate transactions, they rarely do so for anything other than court orders or law enforcement requests. Decentralized stablecoins are truly censorship resistant.
Stablecoin Real World Use Case #2: Proxy for US Dollars
If you are American, you may not have noticed this but others around the world sure have. The US Dollar is strong right now. It’s increasing in value against nearly every other global currency.
The DXY or US Dollar Index is a measure of the USD against a basket of 6 other Western currencies like the Euro and British Pound. And right now, the DXY is at a 20-year high against these currencies. And these are supposed the strongest of the non-US global currencies. Dollar strength here means even more strength against smaller and emerging market currencies.
But without bank accounts or a business in foreign trade, dollars can be hard to find and hold onto for non-Americans. So enter stablecoins. They maintain price stability and that stability is to the dollar. So is it really that big a difference for a Peruvian to hold a physical dollar instead of its digital proxy, the stablecoin? No, it isn’t. And it’s probably easier to transact and exchange with the stablecoin too since many are linked to debit card providers or for use in online transactions.
Even if we don’t want dollars, most of the world and most nocoiners do. Stablecoins give them access when they can’t get USD.
The Dollar’s Unit of Account Dominance
This use case is why despite people hating dollars that people want them or want a stablecoin pegged to the dollar. For something to be money, it needs to be 3 things:
- Store of Value
- Medium of Exchange
- Unit of Account
And the last two, especially unit of account, is where the dollar really dominates. There’s a reason we see stablecoins pegged to the USD instead of the Japanese Yen. It’s the reserve currency as well as the default selection between two other currencies. When in doubt the transaction happens in dollars. It’s by far the most popular unit of account worldwide. Fewer people care about the cross-rate between the Argentinian Peso (ARS) and British Pound (GBP) than they care about both of these currencies and the USD. That’s the reality.
Stablecoin Real World Use Case #3: Fiat On-Ramp & Off-Ramp
This is an important growing use case. If people want to get out of fiat and into cryptocurrencies, stablecoins are often the easiest way.
Why? Because like Bitcoin, Ethereum, and only a handful of others, stablecoins are available on every exchange around the world. You may not want one of those other cryptos. If price stability is what you want instead of 2 transactions (fiat to BTC, BTC to stable), you now only have one where you can buy the stablecoin directly. It’s convenient.
Many emerging markets, as I said earlier, would take dollars if they could. And one of the easiest ways for them to get out of fiat is into stablecoins. Aside from convenience, it’s easy to understand their value since the basis is $1. As a valuable proxy for dollars, fiat on-ramps are important and will get easier to convert from Naira or Pesos to crypto. The big stablecoins are large liquid markets too. This means low fees and low slippage for buyers with emerging market fiat currencies.
The off-ramp part is important too. Those that are unbanked or those that choose to be can use stablecoins as their holdings to pay bills and pay through crypto debit and credit cards. It makes more sense to hold USDT or USDC than a coin that can drop 60% in 6 months as many have. That would reduce your purchasing power. We still must operate in the fiat money/legacy banking world so we need reliable off-ramps. It could be as simple as needing to pay a credit card bill or loan. Or it could be more complex like an expat having expenses to pay in more than one currency. Why subject yourself to both exchange rate risk and asset price risk for these funds to pay expenses when stablecoins eliminate both? It’s a no-brainer.
And within the crypto economy, the fiat on and off-ramps are helpful for trading at centralized exchanges (CEX). While DEXes (decentralized exchanges) are better in many areas than a CEX, most of the best CEXs let you link a bank account or wire funds easily so you can trade. And if needed, take your funds back out the other way. Now that only helps us, not the nocoiners, at least not yet. But it’s a big benefit that it’s getting easier every day to send money to a CEX to buy the crypto of your choice. It will help adoption.
Even though crypto investors hate dollars, it’s for these real world utility reasons that we prefer a stablecoin that pegs to dollars. The unit of account use case is particularly strong. And despite concerns about centralization in the top stablecoins, they continue to grow and thrive. The 3 real-world use cases for stablecoins mentioned earlier show us why these coins are useful right now. Stablecoins are not in the ‘hope to be useful in a couple years’ category where most crypto projects are today.