Stablecoins aren’t anything new. They’ve been around almost as long as cryptocurrencies have, with the first bonafide stablecoin launched way back in 2014. Since then, they’ve largely been used by traders and investors looking for a temporary reprieve from volatility.
But it wasn’t until relatively recently that stablecoins began to evolve to offer users more than simple stability or a fiat alternative, but a viable entry to the world of cryptocurrency. This evolution mainly relates to improvements in how they’re backed and used, making modern stablecoins far more capable than some of the earliest examples.
They’re Being Backed Differently
BitUSD, the very first stablecoin ever launched on a blockchain, isn’t like many popular stablecoins today. Rather than being backed directly by fiat currency held in an account by a custodian, it was instead collateralized by BitShares (BTS) tokens.
Instead of simply being backed 1:1 with the USD-equivalent worth of BTS, users needed to over collateralize, depositing at least twice the value of BTS than the amount of BitUSD they wanted to receive. This was an impractical solution, since few people were willing to put up twice the amount of collateral just for temporary stability.
But things are changing quickly, as newer more capable stablecoin emerge, bringing with them more innovative stability solutions and better utility. Today’s stablecoins now feature a range of clever backing mechanisms, which make them better suited for modern crypto users.
BondAppétit’s USDap stablecoin is a poignant example of this. Rather than simply backing each USDap with USD, these are instead backed by real-world debt obligations. These fixed-income bonds generate a yield ensuring the collateral always exceeds the value of any circulating USDap.
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Other stablecoins, like TerraUSD (UST) instead iterate on the formula set out by BitUSD, by enabling users to collateralize their stablecoins using volatile assets — but without requiring over-collateralization. With TerraUSD, users need to simply burn 1 USD worth of LUNA tokens at current market rates to mint 1 UST.
As decentralized finance becomes increasingly popular, users will likely continue to demand more capable stablecoin solutions, which will push both existing and upcoming stablecoin issuers to keep innovating to meet their changing demands.
Stablecoins Aren’t Just For Stability
In the earliest days of cryptocurrency, stablecoins had one clear purpose — to enable holders to either temporarily or permanently opt out of market volatility.
But while most stablecoins achieve just this, growing interest in personal finance, yield farming, and blockchain-based savings has highlighted the need for a stable solution that is also capable of generating a yield. After all, the cryptocurrency industry is associated with fabulous returns for investors, and this factor is a major driver for many users.
But while most stablecoins can be used to earn a return by participating in various yield-bearing DeFi apps and centralized savings platforms like Crypto.com and Nexo, we are now beginning to see stablecoin options that have yield-bearing properties baked in at the protocol level.
These include the aforementioned USDap, which generates a return for users that participate in a USDap/BAG liquidity pool on an automatic market maker (AMM) platform like Uniswap. These rewards are paid out in BAG tokens, which is the native governance token of the BondAppétit ecosystem. This helps to both maximize liquidity for both USDap and BAG, while also providing holders with a stable return.
BXTB, a blockchain-based game technology provider offers another type of yield-bearing stablecoin — one which uses a combination of two tokens (CHIP + yBXTB) to generate a return for network participants. It achieves this by distributing a fraction of the CHIP transaction fees to yBXTB holders. The yBXTB token can be gained by minting CHIP stablecoins, and then staked to earn these rewards.
Image: BXTB
Moreover, TerraUSD (UST), the LUNA-collateralized USD stablecoin also benefits from a yield-bearing solution via Anchor Protocol — a permissionless savings protocol for the Terra blockchain.
With more and more stablecoins now offering safe, reliable yields for holders, those with a lower risk appetite or weak exposure to cryptocurrencies may soon find themselves tempted into the industry. As a result, stablecoins represent a low-risk way to gain exposure to the benefits of cryptocurrencies, helping to grow the industry as a whole.
