Assessing the Risks and Benefits of Using Stablecoins


4 mins read March 31, 2024

Understanding the Value Proposition of Stablecoins

Stablecoins maintain their stability through various mechanisms. Fiat-collateralized stablecoins maintain a reserve of a specific fiat currency as collateral, offering a 1:1 value ratio. Crypto-collateralized stablecoins are backed by other cryptocurrencies but require over-collateralization due to the underlying assets' volatility. Algorithmic stablecoins attempt to maintain their peg through algorithmic supply adjustments without direct collateral but with varying success. Regardless of the mechanisms of creating the stablecoin, here are a few benefits of stablecoins: 

Price Stability: The primary advantage of stablecoins is their resistance to the volatility that characterises cryptocurrencies like Bitcoin and Ethereum. This stability is crucial for businesses, traders, and everyday users seeking predictable value storage and transactions.

Efficiency and Lower Costs: Stablecoins facilitate faster and cheaper transactions compared to traditional banking systems, especially in cross-border payments, by leveraging blockchain technology while avoiding the fluctuating fees associated with cryptocurrency transactions.

Accessibility: They offer a digital alternative to traditional banking, making financial services more accessible to unbanked populations worldwide.

Additionally, stablecoins are integral to the burgeoning decentralised finance (DeFi) sector, enabling lending, borrowing, and earning interest on assets without traditional intermediaries. Their stability is crucial for customers who wish to avoid the volatility of other cryptocurrencies while engaging in DeFi activities. 

Risks and Limitations of Stablecoins

While stablecoins have attained fame for their prominent use cases across various sectors of finance, there are certain misconceptions about them. For example:

Stablecoins are used for speculative purposes: While speculation exists about their full potential, stablecoins serve practical purposes such as hedging against crypto market volatility, facilitating international trade, and offering banking services to the unbanked.

Stablecoins Are Completely Stable: While designed for stability, stablecoins can still be subject to fluctuations and de-pegging incidents, as seen with several algorithmic stablecoins. Market forces, technical issues, and governance decisions can temporarily or permanently affect their stability.

While these myths are just what they are myths, there are certain limitations that have been raised about stablecoins, such as: 

  1. Regulatory Uncertainty: The regulatory environment for stablecoins is still evolving. Concerns around money laundering, tax evasion, and financial stability have led to calls for tighter regulation, which could impact their usage and acceptance. Concerns over financial stability, monetary policy interference, and the need for consumer protection drive regulators worldwide to consider stringent rules. 
  2. Centralisation Concerns: Unlike their decentralised counterparts, some stablecoins are issued and controlled by central entities, raising concerns about censorship, surveillance, and the potential for manipulation. The effectiveness of stablecoins as a stable medium of exchange depends on the credibility of their backing assets and the governance of their issuers. Mismanagement or lack of transparency can lead to a loss of confidence, undermining the stablecoin's value and functionality.
  3. Collateral Vulnerabilities: Asset-backed stablecoins rely on the underlying collateral's stability and liquidity. Any devaluation or liquidity crisis of these assets could destabilise the stablecoin's value. 
  4. Operational Risks: The technology behind stablecoins, while robust, is not immune to cyber-attacks, technical glitches, or management failures, which could lead to loss of funds or confidence. The security of stablecoins, particularly those relying on smart contracts, poses a risk of hacks and exploits. Furthermore, the management and sufficiency of collateral reserves are critical, with audits and transparency reports being central to maintaining trust.
  5. Algorithmic Stablecoins backlash: Algorithmic stablecoins are designed to maintain their peg through algorithmic mechanisms, adjusting supply based on demand. The collapse of certain algorithmic stablecoins like TerraUST has also highlighted the risks associated with complex stabilisation mechanisms, underscoring the need for robust regulatory frameworks and transparent operations.

What’s next for stablecoins? Innovations and Future Trends

As the crypto market matures, the strategic role of stablecoins is likely to expand and evolve. Their ability to provide stability, enhance liquidity, and facilitate efficient payments positions them as a cornerstone of the cryptocurrency ecosystem. However, the realisation of their full potential hinges on navigating regulatory challenges, ensuring operational resilience and maintaining trust among users. The future of stablecoins is likely to be shaped by ongoing innovations aimed at addressing current limitations and expanding their use cases:

Multi-Collateral Approaches: Innovations in stablecoin design focus on improving stability mechanisms and reducing centralisation. Some stablecoins are exploring the use of diversified collateral to enhance stability and reduce risk, including a mix of fiat currencies, cryptocurrencies, and other assets.

Integration with Central Bank Digital Currencies (CBDCs): The potential intersection of stablecoins with CBDCs could redefine the landscape, offering a blend of private innovation and public trust. While some view CBDCs as competitors, others see a complementary relationship where stablecoins could serve as a bridge between traditional financial systems and the digital economy, leveraging the infrastructure and trust in central banks.

Enhanced Regulatory Frameworks: Clearer regulations and standards are expected to emerge, which will help stabilise the market and foster wider adoption while addressing critical risks and concerns.


Stablecoins represent a significant innovation in the digital currency space, offering a stable, efficient, and accessible means of transaction. However, their benefits come with risks that need careful management and regulatory oversight. The future of stablecoins is promising, filled with potential for further innovation and integration into the global financial system. As the market continues to evolve, so will the solutions to these challenges, paving the way for stablecoins to play a pivotal role in the digital economy. 

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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