What are Stablecoins? Benefits and Drawbacks for Businesses

Stablecoins have emerged as a pivotal element in the cryptocurrency ecosystem, offering a unique blend of traditional financial stability and the innovative capabilities of blockchain technology. 

This comprehensive guide delves into what stablecoins are, their various types, and the potential benefits and drawbacks for businesses. 

Additionally, we will explore the most popular stablecoins – USDT, USDC, and DAI – and how CoinGate facilitates their acceptance for payments.

What is a Stablecoin?

More and more people are asking the question, what is a stablecoin?

Stablecoins are a type of cryptocurrency designed to minimize price volatility. 

Unlike typical cryptocurrencies like Bitcoin or Ethereum, which can experience significant price fluctuations, stablecoins aim to maintain a stable value. 

This stability is usually achieved by pegging the stablecoin to a reserve of assets, such as fiat currency ($US), commodities, or other cryptocurrencies.

Types of Stablecoins

There are four primary types of stablecoins, each with its own mechanism for maintaining price stability:

1. Fiat Backed Stablecoins
2. Crypto-Collateralized Stablecoins
3. Algorithmic Stablecoins
4. Commodity-backed Stablecoins

Fiat Backed Stablecoins

Fiat-collateralized stablecoins (fiat backed stablecoin) are backed by a reserve of fiat currency, such as the U.S. dollar or euro. 

For every stablecoin issued, an equivalent amount of fiat currency is held in reserve by a central entity. This type of stablecoin is the most straightforward and widely used.

• USDT (Tether): The USDT stablecoin is one of the oldest and most widely recognized fiat-collateralized stablecoins. It is pegged to the U.S. dollar and backed by reserves of cash and cash equivalents. USDT is widely used by CoinGate merchants.
• USDC (USD Coin): Similar to USDT, USDC is pegged to the U.S. dollar and backed by fully reserved assets, with regular attestations of reserves provided by third-party auditors. CoinGate also supports USDC payments on various networks.

Crypto-Collateralized Stablecoins

Crypto-collateralized stablecoins are backed by other cryptocurrencies. These stablecoins typically require over-collateralization to account for the volatility of the underlying assets.

• DAI: The DAI stablecoin is a prominent example of a crypto-collateralized stablecoin. It is managed by the MakerDAO protocol and backed by various cryptocurrencies held in smart contracts. DAI is also one of the stablecoins that CoinGate merchants accept for payments.

Algorithmic Stablecoins

An Algorithmic stablecoin maintains its peg through a combination of algorithms and market incentives. 

These stablecoins are not backed by any collateral but rely on software to control the supply and demand.

Commodity-Backed Stablecoins

Reserves of physical commodities, such as gold, silver, or other precious metals support commodity-backed stablecoins. 

For each stablecoin issued, a corresponding amount of the commodity is held in reserve, ensuring that the stablecoin’s value is pegged to the market value of the underlying asset. This type of stablecoin provides intrinsic value and stability due to the tangible backing.

• PAX Gold (PAXG): PAX Gold is a widely recognized gold-backed stablecoin. Each PAXG token represents one fine troy ounce of gold held in secure, insured vaults. 
• Tether Gold (XAUT): Tether Gold is another prominent example of a commodity-backed stablecoin. Each X AUTH token is pegged to one troy ounce of gold, stored in a Swiss vault. This stablecoin allows users to trade and own gold digitally, benefiting from its stability and intrinsic value.

Simplifying the Stablecoin Payment Process

Stablecoins offer a unique blend of stability and innovation, making them an attractive option for businesses looking to integrate cryptocurrency into their payment systems. 

At CoinGate, nearly all merchants accept crypto payments in stablecoins. In fact, in Q1 2024, USDT dominated the payments landscape, accounting for 41.4% of all transactions, as outlined in our quarterly report.

By supporting USDT, USDC, and DAI across multiple blockchain networks, we’re able to provide the most flexible, sophisticated payment method that every merchant can appreciate.

For example, at Ondato, a digital identity management system that accepts crypto payments through CoinGate, USDT payments account for 94.4% of all cryptocurrency payments they collect! You can learn more about it in this case study.

In both Q2 and over the last year, stablecoins have solidified their position as a preferred payment method even further. USDC payments in Q2’24 increased by 24% if we compare to Q1’24, and 94% year over year.

DAI payments also rose by 9% compared to Q1’24. They also rose by 37% compared to Q2’23.

However, USDT still leads the pack and accounts for for 34.2% of all orders in Q2’24, mostly on the TRON network. Read more about stablecoin performance in our H1 2024 payments review.

Businesses can select the network that best aligns with their operational needs, whether it’s the Ethereum network with its robust smart contract capabilities or other emerging networks offering lower transaction fees and faster processing times.

This multi-network support is important for accommodating the requirements of modern businesses, allowing them to leverage the advantages of stablecoins – such as price stability, fast transactions, lower fees, global accessibility, and enhanced security – at the same time as mitigating potential drawbacks like regulatory uncertainty and technological barriers. 

Benefits of Stablecoins for Businesses

Accepting stablecoins as a payment method offers several significant advantages for businesses:

Price Stability 

The primary benefit of stablecoins is their ability to maintain a stable value. 

Unlike traditional cryptocurrencies, which can experience significant price fluctuations, stablecoins are pegged to stable assets like fiat currencies or commodities. This stability makes them an attractive option for businesses looking to avoid the financial uncertainty and risk associated with volatile cryptocurrencies. 

By using stablecoins, businesses can confidently price their goods and services without worrying about sudden changes in value that could affect their bottom line.

Fast Transactions

Stablecoin transactions can be processed quickly, often within minutes, compared to traditional banking systems which may take several days to settle, especially for international transactions. 

This speed can improve cash flow management, allowing businesses to receive payments faster and increase operational efficiency. 

Faster transaction times also mean improved customer satisfaction, as clients and customers receive immediate confirmation of their payments.

Lower Transaction Fees

Transaction fees for stablecoins are generally lower than those for credit cards and other traditional payment methods. 

Credit card processing fees can range from 2% to 4% per transaction, which can add up significantly for businesses with high transaction volumes. 

In contrast, stablecoin transactions typically incur minimal fees, reducing overall payment processing costs. 

Global Accessibility

Stablecoins provide a way for businesses to engage with international customers without the need for currency conversion. Traditional cross-border payments often involve multiple intermediaries, resulting in high fees and long processing times. 

On the other hand, Stablecoins can be sent and received globally with ease, facilitating seamless international trade. 

Transparency and Security

Blockchain technology ensures that all stablecoin transactions are transparent and secure. 

Every transaction is recorded on a public ledger, making it traceable and auditable. This transparency reduces the risk of fraud and chargebacks, providing businesses with greater confidence in their payment processes. 

Additionally, the security features of blockchain, such as cryptographic encryption and decentralized verification, protects against unauthorized access and tampering, safeguarding both the business and its customers’ financial data.

Drawbacks of Stablecoins for Businesses

Despite their advantages, stablecoins also present some challenges that businesses need to consider:

Regulatory Uncertainty

The regulatory environment for stablecoins is still evolving. Governments and financial authorities around the world are in the process of developing and implementing regulations for digital currencies, including stablecoins. 

This regulatory uncertainty can pose risks for businesses that accept stablecoins. 

New regulations could affect how stablecoins are used, taxed, or reported, potentially leading to increased compliance costs and operational adjustments. 

It is important that businesses stay informed and adaptable to changes in the legal landscape.

Centralization Risks

Fiat backed stablecoins are backed by traditional currency reserves and managed by central organizations. 

This centralization means businesses must trust that the issuer has the claimed reserves and can redeem the stablecoins when needed. 

If the issuer fails to maintain these reserves or goes bankrupt, the stablecoin’s value could be at risk. Additionally, centralized control can lead to transparency issues and potential manipulation, which may undermine trust in the stablecoin.

Technological Barriers

Implementing stablecoin payment systems requires technical knowledge and integration with existing financial systems. 

This process can be complex and resource-intensive, particularly for businesses without a strong technological foundation. Companies need to invest in technology infrastructure, staff training, and cybersecurity measures to ensure smooth and secure transactions. 

However, by implementing CoinGate payment processing solution, you can bypass all technological barriers without any hassle.

Summarizing the Benefits and Pitfalls of Stablecoins

• While stablecoins offer numerous benefits, including price stability, fast transactions, lower fees, global accessibility, and security, businesses must also navigate some potential drawbacks. 
• Regulatory uncertainty and centralization risks are challenges that might require careful consideration and proactive management. 
• By understanding these potential issues and preparing accordingly, businesses can better leverage stablecoins to enhance their payment systems and overall operations.

Overview and Comparison of Popular Stablecoins

USDT (Tether)

Launched in 2014, Tether (USDT) is one of the earliest and most widely used stablecoins in the cryptocurrency market. 

It is pegged to the U.S. dollar, meaning each USDT token is intended to be equivalent to one US dollar. Tether achieves this peg by holding reserves of fiat currency and other assets.

Tether’s primary strength lies in its high liquidity and widespread acceptance across cryptocurrency exchanges. 

It is one of the most traded stablecoins, making it a convenient option for traders and businesses looking for stability in their transactions. Its extensive use in the crypto ecosystem provides reliable access to stable digital assets, facilitating seamless transitions between volatile cryptocurrencies and stable fiat value.

USDC (USD Coin)

USD Coin (USDC) is a fully reserved stablecoin pegged to the U.S. dollar.

It was launched by the Centre consortium, which includes major financial players Coinbase and Circle. USDC aims to provide a transparent and regulated stablecoin option in the digital assets space.

One of USDC’s key strengths is its commitment to transparency and regulatory compliance. The stablecoin undergoes regular audits and transparency reports, enhancing trust and credibility among users and regulators. 

This rigorous oversight ensures that each USDC token is backed by an equivalent amount of U.S. dollars, providing confidence in its value and stability.

DAI

DAI is a decentralized stablecoin managed by the MakerDAO protocol. 

Unlike USDT and USDC, DAI is not pegged to the U.S. dollar through a central reserve of fiat currency. 

Instead, it is backed by a diversified pool of cryptocurrencies held in smart contracts, making it a unique player in the stablecoin market.

DAI’s decentralization is a significant advantage, as it reduces counterparty risk and enhances transparency. 

Since no central entity controls DAI, the risk of mismanagement or insolvency is minimized. The decentralized nature of DAI also aligns with the broader ethos of blockchain technology, promoting trustless and transparent financial systems.

Summary

In summary, stablecoins aim to offer a stable, secure, and efficient solution for businesses navigating the dynamic world of digital finance and fiat currencies.

By understanding what stablecoins are and their various types—fiat-collateralized, crypto-collateralized, crypto backed stablecoins, and algorithmic—businesses can leverage their benefits, such as price stability, fast transactions, and lower fees while being mindful of potential drawbacks like regulatory uncertainty and technological barriers.

CoinGate simplifies the stablecoin payment process by supporting popular stablecoins like USDT, USDC, and DAI across multiple networks, making it easier for businesses to integrate and benefit from these digital assets while also managing traditional fiat currencies. Here’s some examples of merchants accepting stablecoin payments like USDT.

If you’re looking to take advantage of stablecoin payments and other benefits that they bring, consider signing up for a CoinGate account.