Will 2024 be the Year of Stablecoins?

Providing stability in an otherwise volatile market, the dynamic nature of the crypto world has emerged as a pivotal instrument for Stablecoins. Given the volatile nature, Web3 technology is changing how we handle assets by turning them into digital tokens, making it easier to transfer them across borders. 

Stablecoins are pegged to stable assets like the US dollar and are becoming super important in this new system. They’re reliable for storing value and are being used more and more for everyday transactions.

Now, looking into the future, some big trends will likely affect how Stablecoins evolve in 2024.

Stablecoins will Increase

In the last couple of years, the Stablecoins market worldwide has expanded to an impressive $100 (£79) billion in market cap, mainly propelled by DeFi, trading, and liquidity management applications. 

Interestingly, the surge in demand for stablecoins hasn’t been as heavily influenced by progress in mobile payments, remittances or settlements. 

As the crypto market evolves, both businesses and regular users begin to understand the value Stablecoins bring with their trifecta of stability, security, and speed in financial transactions. 

There’s been considerable progression in the regulatory landscape, for instance, with the impending introduction of the Markets in Crypto-Assets Regulation (MiCA) across Europe or a dedicated framework for Stablecoins in Singapore. Enhanced infrastructure around custody, identity and access makes Stablecoins more user-friendly. 

With improved infrastructure and more transparent regulations, a rising number of institutional players are likely to join the market and pave the way for more end-user-focused applications in the future.

A Look at Low Volatility Assets

In 2024, we expect to see a surge in the popularity of Stablecoins backed by low-volatility assets.

Investors and users are becoming more discerning, not just looking for stability against one fiat currency but also seeking reduced risk exposure by diversifying across a basket of currencies or goods to hedge against inflation. Stablecoins offer this flexibility for mirroring the value of a single fiat currency and tracking a mix of currencies.

This makes Stablecoins particularly appealing for multinational companies needing seamless cross-border transactions. The choice of settlement currency in global trade carries weighty considerations, from exchange rate stability to transaction costs. Stablecoins, especially those backed by low-volatility assets, can simplify these complexities.

For instance, they can facilitate settlement between carriers for roaming charges, network operators for interconnection fees, or postal operators for delivery costs. They’re also handy for settling freight and transportation expenses in logistics networks. By tracking different currencies or goods, low-volatility Stablecoins offer the best solutions for mitigating risks and hedging against inflation.

Overcollateralization, Transparency and Diversification

For digital assets to be used sustainably, users need to trust that the backing for these assets is solid and sustainable. This is where regulation comes into play, moving in a direction that enhances this trust. For instance, the MiCA legislation distinguishes between fully transparent and decentralized platforms and those that are credit-backed and require permission to access.

When it comes to the backing of Stablecoins, clarity is key – not just regarding the specific assets that provide this backing, but also the other parties involved. Principles like over-collateralization, openness about the backing assets, and spreading out the risk of using various assets are now fundamental elements in designing Stablecoin systems. 

The reality is every asset used for collateral carries its own set of risks. By using more collateral than necessary and choosing a variety of assets, projects can reduce the chance of a single point of failure, ensuring the stability of Stablecoin systems.

Dollar-Based Stablecoins Set to Maintain Their Significance

Their dominance is rooted in the widespread influence of the US dollar in foreign exchange markets and the prevailing high-interest environment. This is especially true in the UK, where inflation and currency devaluation lead to a strong inclination toward stable assets like the Euro. 

Despite the emergence of alternative digital currencies such as cEUR, cREAL, or eXOF, the combined market cap of USDC and USDT alone surpasses $100 (79) million, firmly establishing their dominance in the global Stablecoin space.

A Surge in The Adoption of Local Digital Currencies

As cryptocurrencies increasingly intertwine with conventional financial systems, there’s a growing demand for Stablecoins pegged to local fiat currencies. This shift reflects a broader trend towards embracing digital assets that mirror the stability of regional economies and cater to the specific needs of local markets.

People often need to conduct transactions like paying local vendors and taxes or purchasing raw materials in their local currency. For entrepreneurs requiring a loan to kickstart their businesses, it’s likely their initial earnings will be in local currency. Paying a loan in a foreign currency becomes costlier if the local currency depreciates, making loans in local currencies more desirable for repayment purposes. This is where local currency Stablecoins could come in handy.

In Summary

A deep look into the year hints that the landscape of Stablecoins appears poised for significant development, influenced by a range of factors indicating the maturation of the digital asset ecosystem. The anticipated surge in demand, the shift towards assets with lower volatility, the focus on maintaining ample collateral, the continuous relevance of dollar-backed Stablecoins and the emergence of Stablecoins pegged to local currencies in the UK.

Here’s a list of some popular stablecoins:

  1. Tether (USDT)
  2. USD Coin (USDC)
  3. Dai (DAI)
  4. TrueUSD (TUSD)
  5. Binance USD (BUSD)
  6. Paxos Standard (PAX)
  7. Gemini Dollar (GUSD)
  8. TerraUSD (UST)

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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.