What's in a Name: Are Stablecoins Truly as Stable as The Name Says?

Stablecoins have been on a rollercoaster ride of their own in the past couple of years. But they have rebounded fast to swim rather

Stablecoins, with Tether's USDT and Circle's USDC leading the stable, are cryptocurrencies designed to offer price stability by being pegged to a reserve asset like the US Dollar or gold.

You wouldn't see wild price swings like you would with their volatile counterparts, including even the likes of Bitcoin (BTC) and Ether (ETH) — the two largest cryptocurrencies by market cap.

That explains why they make a good bridge between fiat and crypto.

As with any narrative, there are two sides to the coin. Stablecoins may be crypto's best answer to the shortcomings of traditional finance, but they've gotten their fair share of detractors crying afoul over their reliability — Terra stablecoin's spectacular collapse comes to mind.

Now that the crypto market has snapped out of its wintry slumber, we're seeing accelerated inflows, bringing the total market cap to $2.75 trillion at the time of writing.

Stablecoins' market cap has increased by 16% to $1.55 billion since the start of 2024, and we're seeing new players like WUSD getting people sitting up.

So, are stablecoins indeed swimming instead of sinking? Let's take a closer look.

First things first, how do stablecoins get their stability?

Stablecoins maintain their price stability in three notable ways: fiat-backed, algorithmic, and commerce-backed.

Backing method	Description	Coin name	Advantages	Disadvantages
Fiat-backed	Stablecoin value is directly tied to a reserve of a fiat currency, typically US dollars, held by a custodian or in a trust account.	Tether (USDT), TrueUSD (TUSD)	Considered the most stable method, offers some price predictability.	Relies on a trusted third party to hold reserves. Potential for lack of transparency if audits are not done.
Algorithmic	Stablecoin value is directly tied to reserves of a fiat currency, typically US dollars, held by a custodian or in a trust account.	DAI	Aims for complete decentralisation.  Able to offer flexibility.	Complex system, vulnerable to large price swings during high volatility.
Commerce-backed	Stablecoin’s value is backed by a basket of cryptocurrencies.	WUSD	Leverages on the stability of established crypto, replete with some diversification.	Newer concept, less established compared to fiat-backed options.  Potential for higher volatility depending on the basket composition.

What's good about stablecoins

Let’s get one thing out of the way: You won’t be getting any of those ATH moments for profit-taking pleasures. Stablecoins are good for their versatility in the DeFi space, along with a host of benefits:

• Trade without immediate fiat conversion

• Remit money without exchange rate losses

• Facilitate lending, borrowing, and yield-farming within DeFi platforms

• Support payment services that rely on the blockchain's speed and efficiency

In fact, stablecoins are the most viable choice of crypto to function as a medium of exchange in day-to-day transactions. These days, it's not unheard of for someone's annual bonus to be paid out in a stablecoin. More recently, Grab announced that its users can start paying for their ride-hailings and food deliveries with five of their supported cryptos, with three being stablecoins (XSGD, USDT, USDC).

Major online retailers are also acknowledging the value of stablecoins, with platforms like Overstock.com allowing customers to make purchases using various types of stablecoins.

But why are stablecoins still controversial?

Despite their advantages, stablecoins have taken a reputational hit since the market started crashing in late 2021.

They have been dogged by issues such as lack of transparency regarding reserves, risks of censorship within centralised platforms, susceptibility to regulation, and even market manipulation.

These issues don’t seem to be going away in the foreseeable future. 

Moreover, some critics have pointed out that the value of stablecoins is not always truly pegged to a fiat currency or asset — how are they truly backed? Fiat-backed stablecoins notoriously got de-pegged from the dollar in mid-2022; in USDT’s case, it was later made known that its reserve assets had exposure to troubled lender Celsius.

It is not hard to see why stablecoin holders have a reason to lose sleep; if the custodian of the reserves dissolves, so would their life savings.

Amidst these controversies, financial regulators and politicians alike have given the opaque nature of cryptocurrencies and stablecoins a bad eye. Believing that they can destabilise the financial system in times of crisis, greater scrutiny on developers and issuers has been raised, and they should be regulated and audited like banks.

Of course, if this happens, it would go against the very ethos of cryptocurrency, which was created to operate with decentralisation in the first place.

Why there's a growing need for stablecoins

Stablecoins have drawn flak, but leading players like USDT and USDC did rebound quickly and are still going strong today. New hotshots were born, like WUSD. The need for them is not only irrefutable, it is also growing. 

Speaking of flak, didn’t fiat currencies tell the same tale of wild forex gyrations and banking collapses, with Silicon Valley Bank fronting 2023 as the black sheep?

Now that digital transactions are already the norm, stablecoins present an opportunity to bridge the gap between traditional finance and the burgeoning world of DeFi.

Their relatively stable nature puts them ahead of other mega-cap coins and meme coins (Tesla did accept DOGE payments once upon a time) for everyday transactions, international trade, and a buffer against the volatility of other cryptocurrencies. 

Surely merchants wouldn't fancy the idea of taking payments in non-stablecoins, only to have the value of their earnings depreciate faster than an automobile overnight.

Comparison: Stablecoins, old and new

All the talk about stablecoins might have piqued your interest. In case you're new to owning them and are befuddled by the buffet spread of options, here's a comparison to aid in your decision-making.

Stablecoin	Description
Tether (USDT)	Most widely used stablecoin, pegged to USD but faced controversies regarding reserve holdings
USD Coin (USDC)	Considered a more reputable alternative to USDT, also pegged to USD and backed by a consortium of regulated financial institutions
Binance USD (BUSD)	Issued by Binance, one of the largest cryptocurrency exchanges, pegged to USD
Dai (DAI)	First decentralised stablecoin, not directly pegged to USD but uses a system of smart contracts and collateralised debt positions to maintain a stable price
TrueUSD (TUSD)	Another USD-pegged stablecoin, claims to be fully collateralised by US dollars held in reserve accounts

This is by no means an exhaustive list. There have been emerging stars on the scene, a prime example being WUSD — its parent company WSPN recently announced a high-profile partnership with OpenEden Labs to integrate the stablecoin into the DeFi ecosystem.

What is WUSD?

Worldwide USD, or WUSD for short, is a relatively new player aiming to be the 'next-generation' stablecoin with a unique backing method. It is a flagship offering of WSPN, a leading global digital payments company, and is available on the Ethereum network.

Unlike those backed by US dollars or complex algorithms, WUSD is commerce-backed. This means it's backed by other crypto assets, specifically a combination of Tether (USDT) and a token called WEX. It maintains a one-to-one peg with the US dollar.

WUSD's white paper has outlined its vision of being a stable, transparent, and efficient medium of exchange, promising innovations in integrating with the financial landscape. On top of its stability of being pegged to the US dollar, it has been turning heads in the DeFi yield community with an eye-watering Annual Percentage Yield (APY) of up to 15% per annum.

You can get started on earning yields on WUSD through platforms such as Yield app.

A closing word on stablecoins

It is exciting in the way stablecoins are merging technology and finance. They're fast getting a seat in our financial systems, with new up-and-comers like WUSD potentially revolutionising DeFi and views on money.

Against a backdrop of BTC's epic comeback story, as well as meme coins being in vogue all over again, it speaks volumes about stablecoins getting their legitimate moment sooner rather than later.

As they integrate into ecosystems with the promise of incentives, their growth is likely to accelerate — the data is already showing large supplies of stablecoin in the market, rivalling BTC ETF inflows as a signal for crypto demand and market health. 

We're only in the first innings of a bull run thus far in 2024. If you're a betting man, don't bank on the ‘stable’ in ‘stablecoin’ to mean standing still.