How Stablecoins Are Shaping Crypto

Explore how stablecoins are transforming the crypto landscape, offering a bridge between traditional finance and digital assets with their price stability

Olly Jones

Business Development

Stablecoins are the unsung heroes of the crypto ecosystem— overlooked, yet quietly rewriting the rules of finance. If you've ever looked at the volatility of cryptocurrencies and wondered, "How does anyone use this for real transactions?" then stablecoins are the answer you've been searching for.

So what are stablecoins really doing for the crypto space, and why is everyone—from decentralized platforms to payment giants like Stripe—taking notice?

The Stability We All Needed

Cryptocurrencies have a bit of a reputation problem: wild price swings make using them as daily currency a logistical nightmare. This is where stablecoins step in to save the day.

Bitcoin's 30-Day Annualized Volatility as of October 22, 2024, shows a recent drop to 37.96%, indicating reduced price swings compared to earlier in the year. Source: theblock.co

Unlike Bitcoin or Ethereum, stablecoins are pegged to a stable asset like the U.S. dollar or other commodities such as gold. They give their owner the best of both worlds: the stability of traditional finance and transparency of blockchain innovation.

Think of stablecoins as the bridge connecting old-world financial systems with the cutting-edge, decentralized ecosystems of Web3. They’re bringing everyday stability to an otherwise wildly unpredictable market, with over $170 billion in stablecoins currently circulating in the crypto ecosystem as of Q3 2024.

The Recent Stripe Move

In case you missed it, Stripe recently acquired Bridge $1.1 billion. Bridge is a key player in crypto-fiat payments, and Stripe’s move to acquire them speaks volumes about the future role of stablecoins in global finance.

Stripe has always been about simplifying online payments, but stablecoins add an entirely new dimension—especially for cross-border transactions. This acquisition signals that stablecoins are maturing into a fundamental part of payment infrastructure.

We’re one step closer to a future where businesses, regardless of geography, can pay suppliers and workers instantly without the costly, slow, steps of traditional banking.

Stripe saw the potential: cheaper transactions, near-instant settlement times, and a way to tap into the growing decentralized finance ecosystem. They didn’t just buy a company- they bought into the future.

The Three Archetypes

Stablecoins aren’t all the same- They’re split into three broad types, each with its pros and cons:

1. Fiat-Collateralized Stablecoins

These are the most common—like USDC and Tether (USDT)—backed 1:1 by traditional fiat currency held in reserves. The selling point? Trust. The trade-off? Centralization. The reserve is controlled by a centralized entity, which means you’re effectively trusting that entity to keep its promises.

2. Crypto-Collateralized Stablecoins

Then, there are stablecoins like DAI, which are backed by other cryptocurrencies. This type introduces an interesting twist—they’re decentralized but over-collateralized to account for the underlying asset’s volatility. It’s like creating a stablecoin backed by crypto, but you keep twice as much in reserve to make sure it's rock-solid. That’s what MakerDAO does with DAI—it’s a dollar-pegged stablecoin, but it's backed by Ethereum and other cryptos valued at roughly 155% of all DAI in circulation.

3. Algorithmic Stablecoins

These are the wildcards—no collateral, just algorithms controlling the supply to maintain stability. Think of TerraUSD (before it famously imploded in 2022, losing $60 billion in market value). These can be the most exciting but also the riskiest. They’re essentially the mavericks of the stablecoin world—high-risk, high-reward.

Stablecoins in Action

So, how exactly are stablecoins shaping the crypto world?

1. Cross-Border Transactions

Stablecoins have become the go-to for fast, low-cost cross-border payments. Traditional remittance services can take days and charge you hefty fees. Stablecoins turn that on its head. Now, sending value across borders can be as quick as sending an email, and the cost? Sometimes a fraction of a cent.

Now, a gig worker in the Philippines can get paid swiftly by a client in New York. Instead of waiting five days and losing a big chunk to fees, they get their payment in minutes, directly into a digital wallet, ready to be spent or exchanged.

2. Decentralized Finance (DeFi) Liquidity

DeFi is booming, and stablecoins are the lifeblood of this ecosystem. They provide liquidity for lending, borrowing, and trading across decentralized platforms. With stablecoins, people can take part in complex financial activities without worrying about the inherent volatility of crypto assets.

Take Uniswap or Aave, for instance. The liquidity pools on these platforms rely heavily on stablecoins. The reason? Stability attracts users who want to minimize risk while maximizing opportunities.

3. Hedging Against Crypto Volatility

The crypto market is unpredictable. One day Bitcoin’s up 10%, the next it’s down 20%. Stablecoins provide a hedge for traders, a way to park funds during turbulent times without cashing out into fiat. It’s equivalent to jumping into a safe harbor while the storm passes. During periods of high volatility, it’s normal for trading volumes of stablecoins like USDT and USDC to spike. Investors prefer to keep their capital stable rather than risk further swings.

Stablecoins vs. CBDCs

We can’t talk about stablecoins without mentioning Central Bank Digital Currencies (CBDCs). They’re like cousins—similar in some ways but fundamentally different in control and intent. While CBDCs like the digital yuan are issued and controlled by central banks, stablecoins are private initiatives.

In 2022. the People’s Bank of China (PBOC) reported that the digital yuan had over 260 million users. Source: globaltimes.cn

CBDCs could offer the backing and stability of a government, but they come with questions around privacy and control. Stablecoins, by contrast, are paving the way for private sector innovation—faster adaptation, more use cases, and, importantly, they thrive in a decentralized context.

There’s a dynamic interplay here: as CBDCs start to roll out, we’re likely to see a co-existence, maybe even competition, between state-backed digital currencies and the private-sector champions like USDC or Tether. As of June 2024, China’s digital yuan transactions had already hit 7 trillion yuan (about $986.07 billion).

Each will have its role, but stablecoins are clearly setting the pace in the here and now, especially for use cases like DeFi and remittances.

Challenges on the Horizon

Stablecoins aren’t without their challenges. Regulatory scrutiny is intensifying, and rightly so. Questions about reserve transparency, potential systemic risks, and how they integrate with traditional financial systems are all at the top of regulators' minds worldwide.

Algorithmic stablecoins, in particular, have faced a tough road. The collapse of TerraUSD served as a wake-up call about the risks of algorithmic-backed tokens—it showed that when algorithms fail, they fail spectacularly.

The future of stablecoins will likely hinge on the balance between innovation and regulation—finding ways to maintain decentralization while ensuring user protections.

The Road Ahead

Stablecoins are far more than a safe haven during crypto turbulence. They’re catalysts for the financial revolution that will bridge the gap between the traditional banking system and Web3.

With companies like Stripe making big moves, it’s clear that stablecoins are not just a temporary fix—they are foundational to the future of finance. They enable fast payments, provide liquidity, and make crypto more accessible to everyday users.

If stablecoins are shaping crypto today, it’s safe to say they’ll be shaping mainstream finance tomorrow, transforming it one transaction at a time.

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