The internet has changed life as we know it - with a ride (hello Uber) and even pre-packaged dinner ingredients delivered to your door (hello meal kits) almost instantly. It's easy to look up products and access thousands of reviews by online influencers (hello Instagram), and 'meeting up' could mean screen time on Zoom, Teams or Google Hangouts. It's difficult to imagine not being instantly and digitally connected; large-scale digital transformation has led to a tidal wave of innovation.
Similarly, the finance industry right now is on the brink of a seismic shift, where the digitisation of assets, transactions and financial instruments promises to change the fabric of our global economy. At the forefront of this transformation are stablecoins.
As is typical of any new innovation, stablecoins have found themselves under the scrutiny of well-known commentators, with some questioning their legitimacy and value. (One prominent media commentator recently chose to mock Easy Crypto's stablecoin launch without understanding the stablecoin proposition or coming to us to learn more).
This piece explains some stablecoin basics, busts some of the myths out there and explains the superpowers that will see them play a pivotal role in the evolving landscape of digital currencies.
First things first - what are stablecoins?
Stablecoins represent a category of cryptocurrencies backed by reserve assets, such as fiat currency or precious metals. They have gained popularity for their ability to combine the features of crypto - rapid transaction processing, security and efficiency - with the trust and reliability of an underlying "real world" asset.
The very name 'stablecoin' highlights one of its key attributes — stability. In a world where the value of crypto can swing wildly, stablecoins provide a reliable anchor by being 'pegged' to established fiat currencies like the US Dollar or the New Zealand Dollar. This 'pegging' mechanism ensures that the value of stablecoins remains relatively steady, mitigating the volatility inherent in the broader cryptomarket.
Importantly, stablecoins were never designed to be speculative investments that promise exponential returns. Unlike more volatile cryptos that can experience significant price fluctuations and 'bull runs', stablecoins provide stable value. Their primary purpose is to bridge the gap between traditional fiat currencies and the digital realm, offering a familiar and stable medium of exchange in the crypto space.
Let's bust some myths…
"Stablecoins aren't regulated…"
Contrary to the notion that stablecoins operate in a regulatory 'grey area', many stablecoin projects prioritise compliance and transparency. When issued by reputable organisations, they often undergo regular audits to verify that the digital assets backing them align with their stated peg. This commitment to transparency not only builds trust among users but also fosters a regulatory environment that recognises stablecoins as valuable contributors to the financial ecosystem.
"You can't get good returns from stablecoins…"
Stablecoins have been widely criticised for their lack of investment opportunities, but this is only true for the uninformed. In reality, they offer a unique advantage by enabling users to engage in decentralised finance (DeFi) opportunities, which provide a range of ways to earn yield on holding coins.
> Stake your claim to profits
Staking stablecoins offers a cool way to make your money work for you. If you add your coins into a 'liquidity pool' (such as Uniswap), you gain a twofold advantage. Firstly, by contributing to liquidity, users actively facilitate smoother trading experiences for others within the ecosystem. Secondly, and perhaps more enticingly, this allows individuals to earn passive 'staking' rewards. In essence, your stablecoins not only remain secure under your custody but also have the potential to generate additional value through staking rewards.
> Be ready and waiting
Stablecoins also empower users with a unique ability to navigate the crypto landscape strategically. If an investor wishes to remain on the sidelines, waiting for an opportune moment to enter the market, stablecoins serve as an ideal' parking spot' for funds rather than having to drop out to fiat currency and then move back into another cryptocurrency. With a simple and cost-effective 'swap', users can transition from stablecoins to other forms of crypto when market conditions align with their investment goals.
> Gains for good
Importantly, stablecoins are often criticised for their inability to capitalise on interest. When NZDD was launched as an MVP, Easy Crypto committed to giving back proceeds from the assets under management to the crypto community through grants (this is already happening!) and interest payments (this is under development). These offerings will benefit users through both direct income opportunities and also support the development of new innovations, use cases, and improvements for the NZDD ecosystem.
Ushering in the future of money
The inherent stability of stablecoins and the fact that they are created, issued and managed on the blockchain make them the ideal candidates for a variety of brand new financial services.
One compelling concept is the idea of 'programmable money' in which 'smart contracts' enable automated and programmable financial processes. Smart contracts are self-executing contracts with the terms of the agreement directly written into code - no need for clumsy paper trails or manual processes. They can automate and enforce the execution of contractual conditions and can be used to facilitate many financial operations.
This might sound complex, but it's actually very simple. Consider decentralised lending platforms built on smart contracts and stablecoins. Borrowers and lenders can interact without the need for traditional intermediaries (such as banks or second-tier lenders), streamlining the lending process and reducing costs. Stablecoins play a crucial role in this ecosystem by providing a stable unit of account for loans and ensuring that the value remains constant throughout the lending period.
Cross-border payment systems that utilise stablecoins and smart contracts are also gaining traction. Traditional international transfers are often plagued by delays, high fees and a myriad of currency conversion issues. By leveraging stablecoins and smart contracts, users can execute near-instantaneous cross-border transactions at lower costs. Smart contracts facilitate automatic currency conversion, ensuring that the recipient receives the agreed-upon amount in their preferred currency.
In essence, stablecoins are not just digital currencies; they represent a fundamental building block for a new era of programmable and decentralised finance. As these innovations continue to mature, stablecoins will play a central role in reshaping the financial landscape, empowering entrepreneurs and developers to create a diverse array of digitised financial products and services that can revolutionise the way we engage with money and assets.
Dismissing stablecoins outright is an obvious mistake, given their potential within the evolving global financial landscape. Their use might still be in its infancy, but then again, it took a while for computers to gain traction before transforming the very fabric of our information landscape…
Disclaimer: Crypto is volatile, carries risk, and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.