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What is the U.S. dollar’s role in stablecoin ecosystems?

Author: Content Editor
The use and market capitalization of stablecoins have grown significantly in the past few years, with the market capitalization increasing from $17.6 billion to $170.6 billion and the number of holders increasing from 3.78 million to 119.72 million. However, this growth has raised questions about the safety, security, and potential threats of stablecoins. The collapse of TerraUSD serves as an example of the risks associated with blindly trusting stablecoin systems. Money has evolved from tangible assets to paper and digital forms, with trust being the basis of modern currency systems. Fiat money, which derives its value from government declarations, has weaknesses such as centralization and excessive printing leading to inflation. Stablecoins aim to maintain a stable value by being pegged to a fiat currency, such as the U.S. dollar. The dominance of the U.S. dollar in the global economy is why the majority of stablecoins are pegged to it. Stablecoins like Tether (USDT) and USD Coin (USDC) operate through centralized mechanisms and have faced controversies and skepticism regarding their transparency and reserves. However, DAI is a decentralized stablecoin that is overcollateralized and cannot be frozen or blocked. Stablecoins represent around 1.5% of the global U.S. dollar trade, and once that figure reaches a higher level, governments may need to work with stablecoin issuers to regulate the growing crypto ecosystem. Governments are likely to see the value in reinforcing the global dominance of the U.S. dollar through stablecoins rather than making them illegal. Despite their advantages, stablecoins are not entirely reliable for long-term wealth storage, as seen in instances like the TerraUSD collapse. It is advisable to hold a balanced portfolio of assets that appreciate in value while maintaining a small portion of cash or stablecoins for liquidity purposes.

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