According to a recent Bloomberg report, the payment giant PayPal is exploring the launch of its own stablecoin. But the company has already made headway into the DeFi and crypto space. Since 2020, PayPal users can purchase popular cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) and can now even purchase goods using them.
So, this new revelation may seem a natural extension to some. But why stablecoins and not regular cryptos? Let’s dig a little deeper to find out.
Stablecoins: What’s the appeal?
Stablecoins’ appeal begins with some of the inherent troubles with regular cryptocurrencies like BTC. Despite their many potential advantages, traditional cryptos remain highly volatile.
Take a look at the epic price swings of Bitcoin during 2021.
This level of unpredictable price volatility makes it tricky to buy and sell products using BTC and other similar cryptocurrencies. For instance, when a currency fluctuates rapidly within a short period, pricing an item becomes extremely difficult.
So today, cryptos are recognized more as investments. Many people purchase them in the hope of profiting from a value appreciation. But adoption as a regular currency for day-to-day transactions has been noticeably slow.
On the other hand, fiat currencies are much more stable, making them ideal for product transactions. They cannot, however, offer the speed, ease, security, and privacy that cryptos provide.
Now, stablecoins aim to bridge this gap. By definition, a stablecoin is a crypto that has its value pegged to one or more fiat currencies, commodities, or other assets. This makes it much more stable.
In short, a stablecoin is similar to fiat but with the same security, privacy, and ease of transaction that regular cryptocurrencies provide. In other words, it brings the best of both worlds for DeFi users.
This explains its surging popularity—according to Fitch Ratings, stablecoin assets grew by 450% in 2021.
So, is stablecoin the future of decentralized finance?
It’s still too early to say. Popular stablecoins like Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) have certainly shown promising growth.
These three currencies currently hold a combined market cap of more than $135 billion—that’s a whopping 82% of the stablecoin market.
All three are pegged to the US dollar at a 1:1 ratio. This means they each hold USD reserves to the value of their total circulation, making them fairly stable.
Meanwhile, the rapid growth and high stability of stablecoins have drawn the attention of traditional finance sector businesses, too. And some have already started making adjustments to integrate and support them.
Both Visa and Mastercard, for example, now support settlements with USD Coin. Last September, Visa even proposed a platform that enables interoperability for private stablecoins and public Central Bank Digital Currencies (CBDCs or government-issued digital currencies).
But it’s not all without risks.
The potential benefits of stablecoins are pretty evident. But that’s not to say that they are without risks.
For example, many of these currencies severely lack liquidity, and their adoption for offline transactions has also been slow.
Even popular stablecoins like Tether lack transparency, and their reserves have undisclosed assets. This raises questions about the nature and true value of their reserves and their ability to ensure long-term currency stability. And the lack of regulatory foresight only serves to increase these risks.
There are other complications, too—for instance, not all stablecoins are supported by popular crypto exchanges and wallets. This can significantly limit transactions and use cases.
Having said that, many experts have recognized the potential of well-established stablecoins to transform the DeFi space.
Even Joe Biden’s economic advisors have acknowledged that stablecoins could “support faster, more efficient, and more inclusive payments options” when regulated.
“The business case for stablecoins is that they provide low-cost and easily accessible digital payments within and across national borders,” says economist Eswar Prasad.
But, of course, as with any other financial instrument, it’s essential to weigh up the risks and benefits without diving in headfirst.
A logical extension
Whether PayPal will go ahead with plans to introduce its own stablecoin is yet to be seen. But, regardless of that, the popularity of this crypto is bound to grow in the coming months and years. Its benefits are unmistakable, and the hype has just begun.
Stablecoins could certainly open up new opportunities for PayPal. So, preparing ahead and investing in this space might only seem a logical strategy.
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