The CertiK team has released an update, titled, The Rise of Stablecoins in Unstable Times.
As noted in a blog post by CertiK, the total value of circulating stablecoins currently “stands north of $120 billion.”
As stated in the CertiK update, they have steadily “grown in market share over the last five years, now accounting for approximately 80% of cryptocurrency pair trading volume, up from 40% in 2018.”
In addition to mitigating the price volatility inherent in the cryptocurrency market, stablecoins serve what “is to millions of people an even more important purpose: acting as a financial refuge during periods of economic and political instability.”
CertiK mentioned in the update, that whether in “the face of war, political turmoil, economic decline, or repressive fiscal policies, stablecoins offer an increasingly-attractive hedge against financial volatility.”
CertiK also provided a primer on “the main types of stablecoin and how they maintain their pegs.”
As explained in a blog post, fiat-collateralized stablecoins are “backed by a reserve of fiat currency, like the U.S. dollar, held in a bank account. For each stablecoin issued, an equivalent amount of fiat currency is kept in reserve.”
This direct backing helps “maintain a 1:1 peg to the fiat currency. The market generally values major fiat-backed stablecoins at this 1:1 ratio, but there can be slight deviations if demand significantly outweighs supply or vice versa., particularly common during periods of high volatility”
Crypto-collateralized stablecoins are “backed by other cryptocurrencies. To maintain stability, they often use over-collateralization, meaning the value of cryptocurrency held in reserve is greater than the number of stablecoins issued, to account for the volatility of the backing assets.”
Algorithmic stablecoins use smart contracts “to control the supply of the stablecoin, expanding or contracting it in response to changes in demand or market conditions. An increase in demand leads to more coin creation and a decrease in demand triggers coin burning to maintain stability.”
As noted in the CertiK report, stablecoins are increasingly “favored in countries grappling with high inflation and lack of access to financial infrastructure, notably in Latin America and Africa.”
According to Ernst & Young, Argentina, Iran, Lebanon, Turkey, Venezuela, Yemen, and other nations were all “experiencing hyperinflation in 2022, while Angola, Ethiopia, Haiti, and Syria were approaching hyperinflationary environments.”
The inherent volatility of cryptocurrencies like Ethereum and Bitcoin has “led many individuals in these regions to opt for stablecoins, which present a lower financial risk compared to unpegged cryptocurrencies as well as local fiat currencies.”
In Argentina, where inflation soared to 100%, stablecoins have “become a go-to financial instrument to counter the peso’s rapid devaluation. The transition has been facilitated by crypto companies such as Lemon and Binance, which introduced crypto cards enabling transactions in digital assets. Similarly, in Turkey, stablecoins are gaining traction as an inflation hedge, with 52% of the population aged 18 to 60 investing in cryptocurrencies over the past 18 months. Among these investors, Bitcoin leads with 71%, followed by Ethereum at 45%, and stablecoins at 33%.”
The report continued:
“Stablecoins, pivotal in risk management within Web3, provide a safeguard against the volatility characteristic of the digital asset market. Their significance extends beyond just economic and political scenarios; they are crucial in cushioning the fallout from local fiat currency collapses. As the digital landscape evolves, the relevance of stablecoins in risk mitigation is poised to grow.”
The report further noted:
“Stablecoins offer a reliable currency peg, aiding investors in navigating the complexities of diverse political and economic environments. They are instrumental in facilitating migration to more stable regions, both as a method of payment and as a stable currency in which to save.“
The report concluded:
“Yet, stablecoins face challenges and scrutiny. Their involvement in activities like sanctions evasion and the attention they draw from regulators underscore their complexities. The stability they provide often hinges on the very traditional financial systems and regulations they seek to circumvent. As the digital asset landscape evolves, the contradictions of stablecoins will continue to be a central theme among investors, regulators, and policymakers.”