Stablecoins are a kind of cryptocurrency committed to stabilising the volatile nature of prices that affect most cryptos. Cryptocurrency’s nature is that they are not pegged on other assets. This is the difference with stablecoins. Their value is pegged onto other assets, making them stable over time. This gives a solution to the problem with the other cryptocurrencies. They remain unaffected by the current crypto crash.
Their name suggests better why the coins have remained stable even when the market is crashing. Some stablecoins are backed up while others are not, and those not backed up use some technical means to ensure scarcity. Stablecoins avoid price fluctuations by ensuring their prices are locked in a reserve currency. Its aggregate supply has declined in the past few months despite being stable. Treasures are the main issuers of stablecoins; therefore, when coins are redeemed directly from them, a drop occurs.
Stablecoins are the banks of the crypto, and they are seen as a store of value where the investors in cryptocurrency can turn when the market is most volatile. Tether is the most redeemed stable coin with over 7B. Other coins like DAO and DAI have faced more liquidations than ever before. Terra experienced a crash, and the lending platforms are fighting to solve the insolvency.
What is the impact of stablecoins’ decline in supply?
- When the available coins are few, the market becomes bear. Investors in the market also struggle to get trading coins.
- The decline in supply leads to higher demand. A few coins mean the demand goes high, raising the prices. This may be the opposite of what is expected with stablecoins. Their core aim is to eradicate volatility, but a decline in supply will drive it to the opposite.
- Investors are losing trust in stablecoins since the collapse of Terra. There is no doubt that crypto is still in the infancy stage, and any negative impact could mean no trust in the market.
- The decline in supply leaves the investors with no option to turn to when the other cryptocurrencies market goes bare. This impact can lead to a decline in economic growth since traders have low incomes.
The decline in the supply of stablecoins is being reported for the first time since the emergence of cryptocurrencies. The issuers of stablecoins need to look for the best ways to increase their supply. If they do, it will ensure the decline won’t happen again.