Initially built to provide a better connection between the traditional financial ecosystem and the digital assets landscape, stablecoins have exponentially grown their prominence. Unlike other cryptocurrencies, these cryptocurrencies keep a stable value by pegging themselves to a fiat currency or commodity. Recent figures show explosive adoption of stablecoin transaction volumes, which has many in the financial sector excited and others concerned.
Stablecoin Market Growth
Despite their relative novelty, stablecoins have been operating for several years. They provide this balance, which makes them popular in the cryptocurrency market due to their increased stability as compared to other cryptocurrencies. To date in 2024, total monthly stablecoin volumes have already exceeded $28 trillion, representing growth of more than 50% from last year’s volumes.
Not surprisingly, this amount exceeds the combined total of Visa and Mastercard, the two biggest payment processors, by nearly 8%. This growth underscores the increasing adoption of stablecoins as a medium of exchange and a store of value within the digital economy.
Algorithmic Stablecoins and Risks
Most existing stablecoins are backed 1:1 with reserves of fiat currency or commodities. In comparison, algorithmic stablecoins rely on code to keep their peg. Unlike traditional stablecoins, like Tether or Circle, algorithmic stablecoins don’t keep a bank account full of dollars or gold to back their peg. The crash of the UST stablecoin in the spring of 2022 unfolded within a few hours. Yet this dramatic failure is not an outlier but rather a signal of the dangerous risks associated with harmful algorithmic models.
The total crypto market cap has grown to a staggering $3.32 trillion. This major figure points to a need for better mechanisms to guarantee stablecoins’ own stability. Minimizing volatility takes more work than it does for other crypto.
Privacy Concerns and Emerging Trends
As stablecoins continue to be adopted, so do worries over privacy. On exchanges, stablecoins are often further subject to KYC checks. More recent projects such as Zephyr Protocol, a fork of Monero, increasingly focus on hiding stablecoin transactions on-chain.
With these major developments come serious questions about regulatory oversight and risks of money laundering and other illicit activities. The introduction of new privacy-focused stablecoins might add to those difficulties for law enforcement and compliance functions.
