Why are Stablecoins Important in the Lending Business?
By: Eric Koechlin
Tags: Blockchain, Ethereum, Technology, Bitcoin, Cryptocurrency

The last few days stablecoins have raised a center of attention in the crypto world. On Wednesday, October 24th, Tether burned 500 million USDT stablecoin tokens. The past few weeks have seen massive Tether transactions, particularly after USDT lost parity with the U.S. dollar amid questions about Tether’s access to banking services. Besides Tether, other stablecoins have also experienced unusual behavior. These events led thousands of people around the world start questioning the need for investment on stablecoin and its reliance for intermediary purposes. Now, more than ever, since cryptocurrencies are becoming more stable, investors start to wonder whether stablecoins are imperative.

Strong changes in the market cap can either boost the market with unique investment opportunities or create a temporary recession by driving away investment and devaluing coin and token prices. Therefore, in an unpredictable environment, like the crypto world, stablecoins are pretty important as their role is to bring stability to an unpredictable and highly volatile market, creating an investment space for stable deposits and predictable loans and transactions.

Any institution offering lending, wealth management or intermediary services — such as LOTS — should consider the advantages that stablecoins bring to their fintech environment, while being aware of certain qualities that are therefore needed. Given that value of stablecoins are based on the trust given by their community, they can be pegged to fiat currencies, or exchange traded commodities. It can be backed by another cryptocurrency and linked to a decentralized autonomous organization which controls issuance and pricing — therefore offering real and stable value to its token. Stablecoins play an intermediary role for non-volatile transactions while keeping its nominal value parallel to its real value.

Lending institutions for digital assets could consider using stablecoins as an alternative token to provide their clients more stability with their financial transactions. A loan agreed on a highly volatile currency might seriously jeopardize both lenders and borrowers. For example, if a 1 BTC loan would have been borrowed exactly one year ago ($6,000 approx.) and paid back last December ($19,000 approx), the borrower would have paid over three times the amount he borrowed in real value two months after (in the hypothetical case it was a two-month loan). Now, let’s say that same 1 BTC loan was given last December and paid today ($6,300), the lender would have lost over $10k.

Stablecoins offer the possibility of fair transactions as a token’s nominal value possesses a real value built on their community’s trust and therefore opens possibilities for being used in loans and deposits, as well as more accurate forecasts and investments.

It is important for institutions around the world to rely on the opportunities that stablecoins provide. Stablecoins can offer several advantages as fiat currency does in the traditional financial world, and it can boost the use and trust in cryptocurrencies around the world.

Brian Armstrong Coinbase Daniel Jeffries Noam Levenson Ben Yu Taylor Pearson