We are entering the age of the stablecoin

Stablecoins account for five of the top 20 cryptos ranked by market cap, a sign that investors are increasingly seeking refuge from the volatility of traditional cryptos such as Bitcoin (BTC). The total market capitalization of stablecoins currently stands at around $ 180 billion, up from roughly $ 38 billion a year ago. Their growth has been and continues to be stratospheric.

For those new to the term – stablecoins are crypto facsimiles of fiat currencies such as the US dollar, euro and rand. They allow investors to park profits from crypto trading, but without having to incur the costs of exiting the crypto ecosystem. The costs of on-ramping and off-ramping from fiat to cryptos can eat away at capital, which explains why stablecoins are growing in popularity. Then there is their function as ‘money’ in the world of decentralized finance (DeFi).

“Stablecoins are a direct challenge to fiat currencies,” says Jon Ovadia, founder and CEO of OVEX, South Africa’s largest over-the-counter crypto exchange. “What we are witnessing is the birth of an entire alternative financial system – one which is decentralized, completely transparent and most importantly immutable.”

The flows in this new financial system are directed by smart contracts. These smart contracts are hardcoded into the blockchain and perform key financial operations such as automated market making (AMM), borrow-lend protocols, yield farming, synthetic assets, on-chain insurance and more. Investors can contribute to the DeFi space and earn annual interest rates of up to 20% by locking up their stablecoins in cryptocurrency interest accounts like those offered at OVEX. This has proven popular among people who want to protect themselves against inflation and avoid being exposed to the recent volatility of the crypto markets.

The table below shows the annual interest rates offered by OVEX on various stablecoins and other crypto assets.

OVEX annual percentage interest on stablecoins and cryptos

Source: Ovex.io (ZARP = rand stablecoin; USDT = USD Tether; BUSD = Binance USD; TUSD = True USD; USDC = USD Coin; ETH = Ethereum; BTC = Bitcoin; XRP = XRP)

OVEX offers the largest range of stablecoins in SA, including a range of US dollar-backed stablecoins, as well as the Australian dollar, Swiss franc, yen, pound sterling, Swedish krona and euro.

“The reason we offer such a wide range of stablecoins is because diversity is what our clients are after,” says Ovadia. “A lot of our clients are institutional and high-net-worth investors or come to us from family offices, and they are attracted by the ability to earn high annual interest rates of 15% or 20%, which they cannot obtain in the traditional financial markets. Some of them want exposure to crypto assets like BTC and Ethereum (ETH), but they also want the ability to be able to shift in and out of cryptos into various different stablecoins. ”

Stablecoins such as TUSD and USDC – designed to maintain their 1: 1 US dollar backing – offer some of the following advantages:

  1. They maintain price stability (unlike traditional crypto investments such as BTC and ETH).
  2. They are a form of digital cash, but privately issued and managed in a decentralized manner. Settlement takes place in minutes rather than days (as in the case of banks), and transactions are not restricted to banking hours. Stablecoins can be transferred 24/7.
  3. They transfer faster than traditional money and at much lower cost.
  4. They can be transferred anywhere in the world in mere minutes.
  5. Stablecoins support key capital market operations and usher in new applications for decentralized finance on the blockchain. These include but are not limited to automated market making and peer-to-peer lending / derivatives protocols.
  6. According to the World Bank, the average cost of sending R1 370 from SA to Kenya is 12%. Stablecoins can achieve this at a fraction of the cost.

In total, roughly $ 175 billion is tied up in the five largest US dollar-backed stablecoins: Tether, USD Coin, TerraUSD, Binance USD and Dai.

Another use of stablecoins yet to be fully realized is the ability to extend banking services to the unbanked. There is no requirement for a bank account – only an internet connection. Micro business owners who do not qualify for traditional bank accounts can make use of stablecoins as a way of running their business outside of the traditional banking system.

“I think we’re seeing the beginnings of a massive worldwide swing to stablecoins,” says Ovadia. “As crypto adoption picks up, particularly among institutional and high-net-worth investors, we are going to see a similar adoption in stablecoins. Investors are realizing that they can on-ramp from fiat to cryptos, but switching between the two systems repeatedly is costly. They would rather remain in the crypto ecosystem where costs are far lower than in traditional finance, and where they can earn very attractive annual interest rates by staking (or investing) their stablecoins. ”

Brought to you by OVEX.

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