Stablecoins: Decentralized Finance on Ethereum [2024]

Introduction

Stablecoins – The DeFi sector, over the past few years, has been able to gain massive popularity in the crypto community and even become the most promising direction in the blockchain. The ability to develop various products and new protocols came about thanks to Vitaliy Buterin, the founder of Ethereum.

It is based on the ERC-20 network. Developers have the opportunity to create new projects that will be completely decentralized. This dramatically simplifies transactions in the blockchain ecosystem because people no longer need to pay funds to intermediaries.

But there was a volatility issue on the horizon. Stablecoins were created to solve this issue. These digital assets are designed to facilitate the production and management of Ethereum-based token issuance. Using them also makes it much easier to connect with any project in this ecosystem, thanks to Saddle Finance, Pancakeswap, and other platforms. Keep reading to learn more about the role of stablecoins in the Ethereum blockchain.

Stablecoins concept

Stablecoins are the best example of what cryptocurrencies with fixed prices can look like in a highly volatile market. Most coins are pegged to real-world assets such as fiat currencies, gold, or others to ensure price stability. But still, many stablecoins adhere to the rules of the traditional banking system, such as the USDC Circle. Each crypto dollar must be pegged to its real corresponding, i.e., the US dollar.

But other stablecoins are tied to other assets, such as Ethereum. Thanks to the progressive development of this technology, there are several types of stablecoins in the crypto market. The main ones are described below.

• Crypto collateralized. Ethereum-based asset holding reserves in the form of other digital assets such as USDC, ETH, or BAT.
• These are tokens that are created to find the most profitable yield opportunities. They also have reserves, the size of which mainly depends on the amount of burned or minted supplies. An example of such assets is AMPL and yUSDC.
• Interest-bearing stablecoin. These digital assets are based on the Ethereum blockchain, explicitly created to bring investors interest in their holdings. There are quite a few of them, but the main ones are cUSDC, aUSDT, aUSDC.
• Fiat-backed. These are assets backed by centralized companies and have reserves that are almost entirely US dollars. Examples of such stabilizers are USDC and USDT.
• Synthetix has developed a technology that allows mint sUSD. These stabilizers will support stable operation and exact fees for Synth transactions.

As you can understand from the list above, almost all stabilizers supported by cryptocurrencies depend on Ethereum to one degree or another. Their structure was developed precisely based on the ERC-20 smart contract system. Also, most coins have ETH in their reserves.

Stablecoins in the Ethereum blockchain

In 2019, about 200 stablecoins were issued globally, more than half of which were created on the Ethereum ecosystem. Now, almost 75% of all such coins are based on the ERC-20 network. Their total value is over $20 billion. Thanks to stablecoins, transacting across borders has become much more manageable. They also greatly simplify cooperation between DeFi projects.

Over the past two years, stablecoins such as DAI, USDT, and USDC have grown so much that they are now responsible for most of the financial transactions that pass through the Ethereum network. This is a fantastic result as these virtual assets outperformed ETH, which pays for computation. Such rapid growth and development of stablecoins made the governments of different countries of the world think about creating their equivalents of fiat currencies, which can take the blockchain industry to a new level.

At the end of 2020, it was estimated that the total number of transactions carried out using stablecoins was 1.6 trillion dollars. The Tether USDT token trading volume alone is $580 billion per year. In second place is Circle USDC, which managed to earn $239 billion. The third-place goes to MakerDAO DAI with $100 billion.