2024 will be the year for stablecoins

Stablecoins have emerged as a pivotal instrument in the dynamic world of crypto, providing (relative) stability in an otherwise volatile market. Real-world use cases powered by Web3 technology evolve around the tokenization of real assets and the easy, permissionless and borderless transfer of assets. Stablecoins take center stage in these transfers and have gained prominence as a store of value and a medium of exchange.  

Looking ahead to 2024, several trends are poised to shape the trajectory of stablecoins.

Demand for stablecoins will increase

In the past two years, the global stablecoins market has grown to over $100 billion in market cap, mostly driven by applications around DeFi, trading and liquidity management. So far, the demand for stablecoins has not been driven so much by advancements in mobile payments, remittances or settlements. 

As the cryptocurrency market continues to mature, end-users and businesses alike are recognizing the importance of the combination of stability, security and speed in financial transactions that stablecoins can offer. 

We have seen significant development in the regulatory environment, e.g. with the upcoming Markets in Crypto-Assets Regulation (MiCA) in Europe, or a framework for stablecoins in Singapore. Better infrastructure around custody, identity (account abstraction) and access (costs for on and off-ramping) increases usability of stablecoins. Improvements in infrastructure and regulatory clarity will allow and encourage more institutional actors to enter the market and enable end-user focused applications in the next year.

Low volatility assets will be a trend

One of the shifts we anticipate in 2024 is the rising popularity of low-volatility assets within the stablecoin space. 

Market participants are becoming more discerning, seeking stability not only with regards to the value against one fiat currency, but also becoming increasingly aware of the need for reduced risk exposure to, for example, a basket of currencies or goods as an inflation hedge. Stablecoins can not only track the value of one fiat currency, but are able to track a basket of currencies. 

With that in mind, stablecoins can be a great settlement instrument for multinational organizations that have a need for efficient cross-border settlement transactions. The choice of the settlement currency for global trade has significant implications, including exchange rate stability, liquidity, transaction costs and political considerations. Examples include the settlement of roaming charges between carriers, interconnection charges between network operators, delivery cost settlements for postal operators or the settlement of freight and transportation costs in logistics networks. A multi-currency low-volatility asset can address these complexities. Low-volatility assets are also able to track a basket of goods in a certain country or community and therefore, can be a good hedge against inflation.  

Overcollateralization, transparency and diversification of stablecoin collateral will be key

For a sustainable use of digital assets, users need to know that the collateral of the assets is sustainable. Regulation of stablecoins is going in that direction as well; for example, MiCA differentiates between fully transparent and decentralized platforms and credit backed, permissioned projects. 

Stablecoin collateral needs to be transparent in terms of the assets that are actually used to collateralize the stablecoins, but also in terms of the counterparties involved. Overcollateralization, transparency and diversification of collateral are set to become key pillars of stablecoin frameworks. Every asset used as collateral is prone to certain risks: By overcollateralizing and diversifying assets, projects aim to mitigate the risk of a single-point of failure, ensuring the stability and resilience of stablecoin ecosystems.

Dollar-based stablecoins will remain very important

The dominance of dollar-based stablecoins will persist in 2024. The global influence of the US dollar in FX markets and the high interest environment will support this development. Users in countries experiencing high price inflation and devaluation of their local currencies have a preference to access US dollars or other stable currencies like the Euro. Despite the emergence of other digital currencies, (e.g. the cEUR, cREAL or the eXOF), USDC and USDT alone have a combined market cap greater than $100 million and are dominating the global stablecoin market. 

Local currencies will be the trend

Looking towards 2024, I predict a shift towards the emergence of local digital currencies. As the cryptocurrency space continues to integrate with traditional financial systems, the demand for stablecoins tied to local fiat currencies is expected to rise. 

Read more from our opinion section: Interoperability isn’t just a buzzword

Users need to pay local merchants, taxes or input factors in local currencies. In cases where users have to borrow money to build a business and need a loan to get started, the user will have first revenues for that business in local currency. In order to pay back this loan, a loan in foreign currency would be more expensive if the local currency devalued. Therefore, the user has a preference for a loan in their local currency. Local currency stablecoins can potentially bridge the gap between traditional and digital finance, fostering greater acceptance and adoption.

Conclusion

The future of stablecoins in 2024 is marked by a confluence of factors that reflect the maturation of the digital asset ecosystem. The predicted increase in demand, the trend towards low-volatility assets, the emphasis on overcollateralization and transparency, the enduring importance of dollar-backed stablecoins and the rise of local currency stablecoins collectively paint a picture of an evolving landscape. 

Dr. Markus Franke is an economist who has been working at the intersection of economics and technology in TradFi (J.P.Morgan, Merrill Lynch, Allianz), as a post-doc researcher (including the Ludwig-Maximilians-Universität München, Columbia Business School in New York and Hong Kong University of Science and Technology), and in Web3 (on Celo, as a board member of cLabs, founder of Mento Labs, and advisor of many projects in the EVM space).

Don’t miss the next big story – join our free daily newsletter.