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Why stablecoins are making the news: PayPal and the future of money
- PayPal has been in the news with plans to issue its own stablecoin
- The stablecoin market has grown by 388% in 2021 and is expected to continue growing
- Stablecoins are pegged to underlying assets, such as gold or the US dollar, and are therefore less volatile than other digital assets
- Stablecoins enable quick and low-cost transactions and pay inflation-beating annual interest rates
- Increasing stablecoin regulation across the globe is set to create a more secure, level playing field
- Stablecoins allow digital asset owners to diversify portfolios, limit risk, and earn passive income
Stablecoins have been making the news a lot lately. From regulators to private companies, everyone seems to have their eyes on the stablecoin market. Most recently, it emerged that PayPal is working on its own stablecoin, dubbed PayPal Coin, in an effort to drive the growth of its platform. With more and more new stablecoins being issued around the world, do these assets represent the future of money?
According to the “2022 Digital Asset Outlook” report from The Block, the stablecoin sector grew by 388% in 2021, from $29 billion at the start of the year to a record high of more than $140 billion by the end of 2021. And the report predicts further growth in 2022, as large corporations such as PayPal look to get in on the action.
The growing size of the stablecoin market has also been attracting regulators across the globe, with stablecoins expected to become a significant investor group in certain short-term securities markets. For example, some USD-pegged stablecoins invest in US commercial paper and regulators have their eye on this growing investor base.
We are seeing an expansion of regulatory oversight across the globe, with new rules introduced to govern stablecoins, such as the Regulation on Markets in Crypto Assets (MiCA) in the European Union. And while regulation might be a limiting factor in the use of digital assets such as stablecoins, it may also make them a more legitimate option for storing one’s wealth.
What are stablecoins?
Stablecoins are digital assets that are pegged to underlying assets such as gold or the US dollar. The majority of stablecoins are linked to world currencies, especially of course the US dollar and the euro. This naturally makes stablecoins more stable than other digital assets, such as Bitcoin or NFTs, for example. Hence the name – stablecoins.
According to CoinGecko, there are more than 50 stablecoins in existence today, the largest ones being USD Tether (USDT) and USD Coin (USDC) with market capitalizations of $78 billion and $46 billion, respectively, as of January 20, 2022.
This is why at Yield App we offer USDC and USDT portfolios paying up to 18% p.a*., while we have also introduced a DAI portfolio along with the launch of Version 2 (V2) of our platform paying the same market-beating rates.
DAI is the fifth largest stablecoin in the world by market cap. It is slightly different to USDT and USDC, which are both centralized coins. USDC is backed by US dollars held in reserve bank accounts, while USDT holds cash and cash equivalents, as well as secured loans, bonds, commodities and other investments including digital assets.
Meanwhile, DAI is a fully decentralized stablecoin, issued by the Maker DAO platform. These stablecoins are also called algorithmic stablecoins, since they are backed by other digital assets or use on-chain algorithms to create the currency peg. Algorithmic stablecoins represent an exciting alternative that is completely decentralized, voluntary, censorship-resistant, and fair.
Are stablecoins the future of money?
Due to their lower volatility, stablecoins are a popular option with those looking to preserve and grow their wealth, as well as those new to digital assets. They are also a great option during times of market volatility for those wanting to shield their holdings from price swings, while continuing to earn passive income.
In addition, stablecoins are highly liquid, and therefore allow users to make transactions in seconds, often with relatively low fees, since there is no need for financial intermediaries. This makes stablecoins an attractive option for international transfers, as well as for moving digital assets between exchanges.
The interest rates available on stablecoins are also many times higher than in the fiat world, and often higher than the interest available on other digital assets. An annual rate of up to 18%* that Yield App pays on its stablecoin portfolios, for example, is extremely competitive on such a digital asset without the volatility of Bitcoin and Ethereum.
The bottom line
The landscape for stablecoins continues to change and evolve, with greater regulation emerging in many jurisdictions across the globe. However, with such big names as PayPal looking to get into stablecoins, one thing is clear: the exponential growth they have experienced in 2021 has the potential to continue in 2022. And while it is still unclear what impact increasing regulation will have on stablecoins, it is likely to create a safer, level playing field.
Meanwhile, for digital asset owners, stablecoins represent an important opportunity to diversify portfolios, limit risk, and earn attractive annual rates. Their fiat pegs place stablecoins in a strong position to become a bridge between traditional and digital assets, attracting a wider user base and ultimately bringing digital assets into the mainstream.
*The maximum 18% p.a. on stablecoins is available to those Yield App users who choose to be paid all their earnings in YLD.