Will Stablecoins Return to Their Former Glory in 2023?

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It’s no secret that sta­ble­coins have become a mas­sive key­stone of the cryp­to ecosys­tem. But after a rough peri­od for the cryp­to mar­ket in 2022, they’re strug­gling to find a foothold.

A large por­tion of the world has begun to ush­er in dig­i­tal pay­ment sys­tems while decreas­ing its reliance on phys­i­cal cash. This trend became even more promi­nent dur­ing the worst parts of the COVID-19 pandemic.

Sta­ble­coins are a key talk­ing point with­in this sec­tor, espe­cial­ly con­sid­er­ing their mas­sive uptick in mar­ket cap­i­tal­iza­tion and dom­i­nance over the past few years. Prob­lems began to arise, how­ev­er, after instances of these coins becom­ing depegged and skep­ti­cism around their reserves grew. 

Will a new year be able to bring about the changes need­ed to repair the dam­age that’s been done? 

Stablecoin Market Cap Slump 

The mar­ket cap­i­tal­iza­tion of sta­ble­coins has decreased sig­nif­i­cant­ly, now falling below the $140 bil­lion mark. The amount cur­rent­ly stands at $138 bil­lion, accord­ing to data from a recent Cryp­to­Com­pare report. This is the low­est val­ue seen since Sep­tem­ber 2021.

Market Capitalization of Stablecoins Source: CryptoCompare
Mar­ket Cap­i­tal­iza­tion of Sta­ble­coins Source: Cryp­to­Com­pare

The report also hint­ed that their mar­ket dom­i­nance declined below 12.5%, sug­gest­ing that mar­ket par­tic­i­pants rotat­ed out of sta­ble­coins and into risk assets. Mul­ti­ple dif­fer­ent sta­ble­coin col­laps­es last year exac­er­bat­ed a sink­ing cryp­to mar­ket. Even lead­ing projects like Teth­er (USDT) and Circle’s USDC briefly lost their USD pegs.

The most dis­as­trous among these, how­ev­er, was Ter­ra USD (UST), the famed algo­rith­mic sta­ble­coin led by Do Kwon. UST essen­tial­ly went to zero with­in one day along­side its sis­ter token, LUNA. This caused a rip­ple effect that spread to oth­er relat­ed assets.

A Rippling Effect

Vad­er Pro­to­col paused the mint­ing of its USDV after the col­lapse of UST and spent the remain­der of the year try­ing to imple­ment a more sus­tain­able and cap­i­tal-effi­cient algo­rith­mic sta­ble­coin design, which proved to be in vain. Mean­while, Neu­tri­noUSD, which has a mar­ket cap of $20.70 mil­lion, could not recov­er its peg after being off par­i­ty for more than five months. 

These events were extreme­ly detri­men­tal to the algo­rith­mic sta­ble­coin mar­ket cap: 

Market Capitalization of Algorithmic Stablecoins Source: CryptoCompare
Mar­ket Cap­i­tal­iza­tion of Algo­rith­mic Sta­ble­coins Source: Cryp­to­Com­pare

There is some opti­mism that things will turn around for the bet­ter in 2023. Moody’s, a cred­it rat­ing firm, is now tak­ing steps to incor­po­rate a scor­ing sys­tem for sta­ble­coins, with analy­sis for up to 20 dig­i­tal assets, Bloomberg report­ed on Jan. 27. 

Will Stablecoins Flourish in 2023?

For years now, there has been a great deal of uncer­tain­ty and mis­trust sur­round­ing Teth­er and its reserves. Steps like reg­u­lar audits and even a third-par­ty rat­ing sys­tem could help boost the legit­i­ma­cy of this asset class. 

Reg­u­la­tions on this sec­tor are at the top of the agen­da, espe­cial­ly in the U.S.

Two lead­ing Aus­tralian banks have already unveiled sta­ble­coins projects, while Japan is also con­sid­er­ing adopt­ing them into their economy. 

Apart from this, sta­ble­coins have seen sup­port from Apple Pay, Mas­ter­card, and many oth­er major indus­try play­ers. These inte­gra­tions make it easy for new users to enter the space.

In addi­tion, sta­ble­coins have had a notice­able impact on cryp­to adop­tion. Of late, one of the lead­ing plat­forms, Car­danolaunched its own dol­lar-pegged cur­ren­cy called DJED. 

A Payment Gateway

Visa’s out­go­ing CEO, Alfred Kel­ly, high­light­ed the poten­tial of sta­ble­coins as a pay­ment gate­way. Speak­ing to BeIn­Cryp­to, the chief exec­u­tive asserted: 

“It’s very ear­ly days, but we con­tin­ue to believe that sta­ble­coins and cen­tral bank dig­i­tal cur­ren­cies have the poten­tial to play a mean­ing­ful role in the pay­ments space, and we have a num­ber of ini­tia­tives underway.”

Visa has main­tained an unde­terred pos­i­tiv­i­ty toward cryp­tocur­ren­cies, even in the face of adverse mar­ket con­di­tions. Sta­ble­coins are a tremen­dous inno­va­tion that can help to bol­ster how finances are con­duct­ed in our day-to-day lives.

With sta­ble­coins, one can send vast amounts of cash in sec­onds to any­where in the world for near-zero fees. As cryp­to adop­tion grows, sta­ble­coins could be used for cross-bor­der and retail busi­ness trans­ac­tions around the world, and even have the poten­tial to replace the US dol­lar as the pri­ma­ry trade currency. 

How­ev­er, it could turn out to be a dou­ble-edged sword. If Sta­ble­coins ever reach this lev­el of util­i­ty, gov­ern­ments will sure­ly make sure they are heav­i­ly regulated.

Disclaimer

All the infor­ma­tion con­tained on our web­site is pub­lished in good faith and for gen­er­al infor­ma­tion pur­pos­es only. Any action the read­er takes upon the infor­ma­tion found on our web­site is strict­ly at their own risk.



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