The stablecoin sector is one of the most interesting in the market. These advanced tokens continue to evolve and change to meet new demands or methods of fighting volatility. Today stablecoins come in all shapes and styles. Consequently, it can seem like a daunting task attempting to unravel all the competitors and the market in general.
The good news is that the stablecoin market is closely monitored today by multiple sources and data is readily available for those who seek it out. Stablecoins are no longer just a concept. Today, they are a vital part of the blockchain industry. To put the sheer size of this market into perspective. As of January 2023, the total stablecoins market cap is $138.4B with analysts predicting continued growth in some areas moving forward.
What are Stablecoins?
The stablecoin concept grew from a desire to create a digital asset that was immune to the volatility experienced by other digital assets. Cryptocurrencies like Bitcoin and Ethereum bring a lot to the table in terms of convenience and trackability. However, their value comes from their market cap and demand. As such, digital assets are usually extremely volatile.
This landscape began to change when developers started to configure different ways to keep their creations stable during volatility. The first stablecoins used self-adjusting returns and algorithms to attempt this process. It’s surprising to people to learn that crypto-backed stablecoins were among the first.
Fiat-backed and commodity-backed projects weren’t too far off with the introduction of Tether (USDT) marking a significant change in the market. Tether was the first stablecoin to be placed on an exchange. This maneuver proved to be a game changer as it enabled traders for the first time to be able to escape volatility on these platforms without exiting the blockchain market.
Regardless of how a stablecoin is maintained, the majority attempt to keep a 1:1 peg to fiat currency. This means that 1 USDT is equal to $1 in most instances. Of course, these platforms aren’t perfect and there are times where the peg will be off by a few cents in either direction. Still, there are so many advantages of these digital assets that can’t be ignored. As such, they are a vital tool in most traders’ arsenals today.
The Stablecoin Market is Vibrant
One of the first things to understand about the stablecoin sector is that new projects are entering every few months. These new protocols seek to improve on their predecessors through the integration of proprietary systems. When examining the market as a whole, it becomes evident that there is far more activity going on in terms of developers than just the Tether project.
Statistics show increased daily activity in both algorithmic and commodity-based projects as well. These systems have seen considerable growth in users as they provide a way for people to escape the inflationary concerns currently battering the fiat sector. Inflation is a loss of buying power in a currency and in many parts of the world it’s at a 40-year high which has led people to explore other options for long-term saving.
Stablecoins are Becoming More Dominant
Despite the total crypto market experiencing a retraction over the last year, the stablecoin market has seen its dominance in the industry increase. Analysts point out that the crypto market has seen as much as $1.2 trillion decline compared to its peak. However, even with some projects down over 50% from their all-time high, stablecoins are doing their thing.
Stablecoin dominance fluctuated through the year with the average being around 5.6%. There are also times when stablecoin usage peaked at 17%. This dominance came about due to extreme market conditions such as when the FTX exchange collapsed. During these times of uncertainty, people converted to stablecoins to prevent losses.
When you delve into the market you can see there are some key players currently. At this time, USDT is still the most popular option for short-term volatility effects. The project currently has 49% dominance in the sector. It’s followed by USDC with 30% and BUSD, Binance’s stablecoin project, at 11%.
Ethereum-based Stablecoins are the Most Popular
When you break down the stablecoin data further based on blockchains, you get some interesting insight into the market. Currently, the majority of stablecoins are on Ethereum 59.9%. This discovery isn’t hugely surprising as Ethereum is still the largest DeFi and Dapp community.
Surprisingly, Tron 27% has a larger share of the market than expected at 27%. The Binance smart chain falls in third as it’s the backbone of BUSD. From there, you delve into proprietary blockchains built specifically for the projects they support and other styles of stablecoins in operation.
The stablecoin market in general has shrunk alongside the rest of the cryptomarket. This decline from $167.9 billion on January 1, 2022, down to $138.4 billion on January 31, 2023, can seem like a bad thing but, when you zoom in on the rest of the market, it makes perfect sense.
When the entire industry is in a bear market, it’s understandable for the sector to shrink by 17.6%. Of the main blockchains used to host stablecoins, Solana experienced the biggest decline in usage dropping 69.1%. Notably, other networks experienced growth in terms of stablecoin projects. Binance (BUSD), USDC, and META 1 Coin saw growth last year even with the market conditions getting rocky for most projects.
Fiat-backed Stablecoins are Shrinking
One interesting revelation this data reveals is that fiat-backed stablecoin projects are less popular than before. Projects like the Gemini dollar and even the market leader USDT, have seen declining usage due to their limited long-term store of value characteristics.
Fiat Stablecoins by Currency
There are more USD-backed stablecoins than any other fiat currency. USD stablecoins show a 98.9% dominance thanks to the success of projects like USDT and their integration into most major CEXs. In total, there are around $137 billion in USD-backed tokens in circulation. The remaining fiat projects can be attributed with roughly $1.45B in market cap with the majority being EUR-backed projects.
Types of Stablecoin Holders
The Blockchain Research Lab recently conducted some testing to try and better gauge the number of traders using stablecoins at this time. According to their tests which surveyed 427 random crypto holders, stablecoin use is essential. Almost 75% of those surveyed said they hold stablecoins at the moment.
The reports showed that only 9% had never used stablecoins prior. Additionally, the same report revealed that only around 10% of stablecoin holders leverage their tokens for long-term saving. This stat makes sense since the majority of stablecoins are fiat-backed and inflation has made it nearly impossible to save using these assets at the moment.
Over-Collateralized Versus Undercollateralized
Delving into the structure of stablecoins, it’s easy to see that most derive value from off-chain assets via an over-collateralized reserve. This approach is highly effective but does make the user rely on the issuer to provide accurate audits and reserves. Endogenous stablecoins, those that use other digital assets to remain stable, are the least popular at this time.
Fiat-backed Stablecoins Are Not Used for Major Purchases
Another interesting fact that researchers revealed is that the majority of stablecoins aren’t used for making purchases. Only Tether has seen real use to make payments in the market. Other stablecoin projects are serving the role of volatility escape for traders the majority of the time.
Stablecoin Usage Depends on Your Region
Another cool fact is that stablecoin users vary based on their country. For example, Asian stablecoin users are more likely to rely on commodity-backed projects versus fiat stablecoins such as their Western counterparts. This stat makes sense as there are more exchange restrictions in Asia which means that fewer people are using these assets to trade versus attempting to escape inflation and save.
Another funny yet eye-opening stat is that there are a lot of people that lose money on stablecoins for dumb reasons. The most common reason you would lose money on your stablecoin purchase is by making it when the tokens value is slightly above $1. Project holders for DAI and other popular tokens have experienced this phenomenon where it’s difficult to keep the value of the token pegged to $1 versus higher values.
When you pay more for a stablecoin than its peg, you are throwing money away as the project is designed to correct and shed off this added value. That means if you are going to trade into a stablecoin you should always wait until it’s slightly under its peg or exact.
CEX Stats
Zooming into CEXs (centralized exchange) to gain more insight into these assets’ usage, you can see that stablecoins is the primary type of stable asset on these platforms. Fiat-backed stablecoins control approximately 75% of the stablecoin exchange market share. Additionally, the majority of all stablecoin activity happens on these massive platforms.
Amount of Stablecoins Stored on CEXs
Researchers revealed that the amount and value of stablecoins in use on CEXs are on the rise. The reports show that there are +$36B in stablecoins currently in circulation on CEXs globally. This number continues to increase as more exchanges and projects launch.
Fully Decentralized Stablecoins Are Harder to Maintain
Another eye-opening revelation is that decentralized stablecoins have a much higher failure rate than their centralized counterparts. Herein lies one of the conundrums of the stablecoin concept. How can you provide accurate reserves and transparency to users while using off-chain assets held by a third party?
Notably, fully blockchain-based seigniorage algorithmic stablecoins were introduced as the solution to this problem but they haven’t been able to fully figure out a solution. The problem with using all on-chain assets for reserves is that there are times when the entire market declines. During these instances, it can be impossible to acquire enough reserves on time to remain stable.
New Forms of Stablecoins Are Changing the market
When you break down the rest of the market that isn’t using fiat stablecoins, you see that commodities make up the majority of non-fiat-backed projects at 67.4%. Commodity-backed stablecoins recently got some major upgrades with the introduction of safehaven tokens.
Safehaven Tokens
Safehaven tokens can be thought of as evolved stablecoins. They are specifically designed for saving and include features to help protect long-term value and decentralization. The safehaven concept is still new but there are already some exciting projects pioneering the concept.
META 1 Coin
The META 1 Coin project is the most advanced stablecoin to hit the market to date. This safehaven token introduces a variety of unique protections to keep you safe over time. For example, only humans can trade META 1 Coins. This decision was made to prevent whales from entering the market in the form of trading groups and bots.
META 1 Coin leverages a basket of gold-related assets to remain stable. This structure is ideal because it provides a long-term store of value traits combined with self-appreciation. Gold has proven to be a solid source of value but isn’t very convenient or practical. META 1 Coin combines the best aspects of gold, crypto, and a variety of protections to prevent losses.
The Future is Stable
When you look at the market and its current direction, you can see why projects like META 1 Coin are seeing massive adoption. People want a stable asset that is both good for saving and escaping short-term volatility. As such, there is strong demand for projects that protect users and provide convenience and stability in a proven package. For now, you can expect to see more growth in the stablecoin market as more people leverage these awesome projects to generate and store wealth.