What are stablecoins and what business opportunities do they bring to the crypto market?

Like other crypto assets, stablecoins have grown significantly in recent years due to their potential for innovation and portfolio diversification. These currencies, created with blockchain technology, offer safe and convenient alternatives for exchanging assets like dollars and gold, anywhere in the world, with lower costs and bureaucracy.

But is it a safe market? What is the potential of stablecoins and what income opportunities do they offer to businesses? What differences do they have compared to the more traditional and famous cryptocurrencies we already know?

We tell you the most important things about stablecoins, in addition to detailing what they can offer in terms of business both inside and outside the crypto environment!

To start: What are stablecoins?

Stablecoins are also cryptocurrencies, but with a specific feature: they are tied to a defined value in relation to real-world assets. In other words, they are like the crypto version of a real currency. They can be backed by fiat currency (such as euros or dollars) or a commodity, like gold. Their function is to serve as a stable asset to facilitate the conversion of values between fiat currencies and cryptocurrencies (hence their name, "stablecoin").

Let's think of practical examples of stablecoins:

• 1 unit of stablecoin X backed by the dollar, traded on exchanges (crypto markets) = 1 dollar
• 1 unit of stablecoin Y backed by gold, traded on exchanges = 1 troy ounce of gold in the international market

Like other cryptocurrencies, stablecoins are created and traded using blockchain technology, encrypted, and do not suffer interference from the traditional financial system (such as banks). Because they were designed to follow the variation of assets like the dollar and other commodities, their main feature is low volatility. For these and other reasons, stablecoins serve as investments that provide more stability and diversification to cryptocurrency portfolios, being traded virtually without having to go through the bureaucracies of the traditional financial system.

A constantly growing market

Stablecoins are just a part of the cryptocurrency market, but that doesn't mean they are a topic only for a few enthusiasts. Their total global market reached $138.4 billion in January 2023 and grows year after year. Furthermore, the scenario is even more promising, as more actors and large companies are interested in taking advantage of decentralized finance (DeFi) and blockchain technology that supports these currencies.

In Argentina, where cryptocurrencies are increasingly adopted as an investment alternative and shelter against inflation, stablecoins lead the crypto purchase preferences after Bitcoin and Ethereum, according to the platform CryptoMarket. The preferred choice is those backed by dollars: with 38% preference, Tether (USDT) is the most chosen cryptocurrency in the country, helping the population to trade "in dollars" without the limits of monthly acquisitions of the American currency. And, in other countries in the region, these currencies are not far behind either: in Brazil, stablecoins accounted for 83.5% of the volume moved in the crypto market in the first quarter of 2023.

The different types of stablecoins (and the most used)

There are several dozen stablecoins on the market. The most important ones are divided into three types:

Backed by fiat currency

They are paired with currencies such as the dollar, the euro, and others. For each stablecoin generated through the blockchain, its issuer (usually a company) has the same amount of the respective currency deposited in cash as reserve. Its appreciation or decline follows the exchange rate of the currency to which it is linked.

The most known and traded in Argentina, in Latam and worldwide is Tether (USDT), backed by the dollar, which began the development of other stablecoins starting in 2018.

Backed by commodities

They are paired with commodities, such as precious metals, which have historically served as financial hedge assets against major fluctuations in capital markets. Gold is the most commonly used asset in this type of stablecoin, with PAX Gold (PAXG) being the most well-known example.

Another example is our partner Agrotoken, which innovated by tokenizing agricultural products like grains, turning them into stablecoins collateralized by the farmers' production (for example, 1 SOYA = 1 ton of soy). This scheme allows producers to save, invest, and carry out transactions with their production, even with their cards powered by Pomelo.

Backed by cryptocurrencies

They are linked to other cryptocurrencies. For example, DAI is a representation of ether (ETH), which uses a self-regulating system to remain stable even when it fluctuates. These stablecoins are not as popular as the two types mentioned above.

Investments, regulations, and value propositions: differences with traditional cryptocurrencies

As we have already seen, stablecoins are a type of cryptocurrency, but they have some clear differences compared to assets like bitcoin, ether, and NFTs:

• Collateralized against volatility: Changes of 10% in a single day? None of that. Stablecoins aim to maintain a stable unit of value. They are not based on their own algorithm for issuance, do not have a mining system or their own blockchain, which are characteristics of bitcoin and ether. Moreover, they are collateralized, meaning they are backed by assets that serve as a guarantee (such as fiat currencies and commodities). The 'exception' are those backed by other cryptocurrencies, which do not have parity with traditional assets.
• Different investment approach: Traditional cryptocurrencies stand out for their great potential for appreciation. They have grown as an independent and inflation-free investment alternative to fiat currencies. Stablecoins, on the other hand, do not have this focus. Most of the time, they are developed by already established companies as an easier way to gain exposure to assets like the dollar, for example. This is done without going through the bureaucratic and fiscal processes of buying and selling strong currencies. Additionally, a stablecoin can be traded on exchanges available anywhere in the world, with low transaction fees.
• Exposure to the world of real assets: Because they are representations of other real assets (but traded in a blockchain environment), stablecoins follow the fluctuation of these very assets in a controlled manner. As such, they are completely subject to the decisions of governments and central banks. If the dollar rises, a stablecoin like Tether also rises, and so on! More speculative cryptocurrencies, like bitcoin and ether, are influenced by market sentiment, not by direct decisions.
• Everything can become a stablecoin: Stablecoins in the market are exactly the digital conversion (tokens) of assets deposited in the traditional financial system (that is, they are not assets simply created out of nothing!). The agricultural tokens from Agrotoken are a very interesting example of stablecoins, but there are also cases of tokens linked to the fluctuation of collectible luxury goods prices, such as artworks and even rare wines, which are long-term investments and appreciate over time as their supply decreases and demand remains (or increases).

What opportunities do stablecoins offer for financial companies?

Stablecoins simplify investment in assets like the dollar, gold, and others, as we have already seen in this article. However, they offer opportunities that go beyond the conversion between the physical and the digital.

Within the DeFi ecosystem and blockchain technology, stablecoins offer possibilities such as:

• Use as collateral in crypto asset derivative transactions (such as buying and selling futures contracts, options, and swap operations);
• Assets for staking, a type of cryptocurrency lending that supports the development of blockchain networks or DeFi projects and generates interest;
• And other digital asset lending activities.

And in the real economy...

By connecting stablecoins with the real-world economy, many new possibilities open up for businesses, card issuers, and even governments. For example:

• An exchange can offer real-time transfer solutions through stablecoins. This provides opportunities for more secure and lower-cost transactions than buying and selling paper currency;
• Similarly, stablecoins can be used as a payment method on crypto cards, allowing users to pay for daily purchases with the balance in their exchange or fintech account that issued the card. This means income from interest and the interchange fee model.

Stablecoins are a world full of possibilities yet to be explored, but they already show many practical uses for those who want to invest, diversify their portfolio, or take advantage of business opportunities. All of this goes hand in hand with the evolution of decentralized finance, increasingly bridging the gap between cryptocurrencies and physical world financial assets!