Stablecoins: are they the safe haven?

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CryptoMode Energy-Backed Stablecoins

Stablecoins are becoming more and more popular nowadays due to the unstable situation of the market and the expectation of a prolonged crypto winter. With the recent depegs of several stablecoins, it’s natural that some people might feel frustrated and wonder which stablecoin will survive the storm. The options are tremendous from fiat-backed stablecoins like USDT to energy-backed like JAX. 

Store of value

A bear market always comes unexpectedly, spreading panic and bleeding the wallets of many. The market capitalization shrinks drastically, as more people cash out the funds. Meanwhile, others convert their cryptocurrencies to stablecoins, hoping to weather the storm in the quiet waters. At the moment of writing, the stablecoin share ($153 billion) constitutes nearly 15% of the total market cap, which is currently sitting above $1 trillion. 

Use cases of stablecoins are quite diverse. Apart from being considered a store of value and safe haven in the events of extreme volatility, stablecoins are actively being used for cross-border transactions and remittances. Compared to traditional payment methods where migrants pay up to 10% in settlement fees, stablecoins with transaction fees that rarely exceed a dollar look especially attractive. According to World Bank, cross-border remittances reached $589 billion only in 2021 alone. That’s a huge market that still hasn’t discovered all benefits of stablecoins and can be a potential booster to the crypto space in the future. 

Classification of stablecoins

The innovation in the cryptocurrency and blockchain space evolves at the speed of light, with new projects popping up here and there. At the moment, CoinMarketCap shows 132 stablecoins of different nature. Most of them fall under one of the following categories traditionally identified on the market:

  • Fiat-backed stablecoins use fiat currencies such as USD or EUR as collateral, ensuring the stability of the price, where 1 unit of a stablecoin always equals 1 unit of a fiat currency. Examples of fiat-backed stablecoins include USDT, USDC, BUSD, etc.
  • Cryptocurrency-backed stablecoins are collateralized by other digital currencies such as BTC, ETH, etc. A prominent example of cryptocurrency-backed stablecoins is DAI, which uses the MakerDAO lending protocol where users can borrow DAI by depositing BTC, BAT, ETH, etc to the contract as collateral. 
  • Commodity-backed stablecoins use real-world assets such as gold, oil, etc as collateral. For example, the value of PAXG is pegged 1:1 to the value of one fine troy ounce of a London Good Delivery gold bar, which is priced at $1745 at the moment of writing.
  • Energy-backed stablecoins use energy reserves, so they are stable to the production cost of hashrate in the real world. For example, JAX can only be created when miners burn their BTC + JXN block rewards, thus transferring value from the electricity spent on mining, which has a stable cost over time, to JAX.
  • Algorithmic stablecoins, as the name suggests, make use of a special algorithm that controls the supply of tokens in circulation. The notorious UST that crashed earlier this year was an algorithmic stablecoin that utilized a burn-mint mechanism with LUNA.

Conclusion

Stablecoins are certainly a great store of value, especially during times of economic instability. They are easily transportable across borders, fast in payment settlement, cheap compared to fiat payment methods, and don’t require the help of any middlemen. Moreover, energy-backed stablecoins like JAX can help to reduce the effects of inflation, as the electricity cost has shown to be more stable in price so far, compared to other consumer products.


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