A deep-dive on stablecoin adoption and challenges in Nigeria.

INTRODUCTION:

In Nigeria, where economic instability and limited access to traditional banking services prevail, stablecoins offer a promising alternative for financial inclusion and cross-border transactions. However, despite their potential benefits, stablecoins face several challenges in adoption and implementation within the Nigerian context.

WHAT ARE STABLECOINS?

Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for common transactions.

Understanding Stablecoins: The Basics.

Stablecoins are digital assets designed to maintain a stable value, typically pegged to a fiat currency or commodity, and hold a significant market capitalization in the digital asset space. There are several varieties of stablecoins, such as fully collateralized ones like USDC, and those that use a mix of algorithms, collateralization, or other means to sustain their value. Highly valued for their ability to address the issue of extreme price fluctuation associated with crypto-assets, stablecoins can be used for both daily transactions and long-term investments.

KEY TAKEAWAYS ON STABLECION.

• Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference.
• Stablecoins are more useful than more-volatile cryptocurrencies as a medium of exchange.
• Stablecoins may be pegged to a currency like the U.S. dollar or to the price of a commodity such as gold.
• Stablecoins pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that are supposed to control supply.
• Stablecoins continue to come under scrutiny by regulators, given the rapid growth of the $128 billion market and its potential to affect the broader financial system.

WHY ARE STABLECOINS SO IMPORTANT?

Though Bitcoin remains the most popular cryptocurrency, it tends to suffer from high volatility in its price, or exchange rate. For instance, Bitcoin’s price rose from just under $5,000 in March 2020 to over $63,000 in April 2021 only to plunge almost 50% over the next two months. Intraday swings also can be wild; the cryptocurrency often moves more than 10% in the span of a few hours. All this volatility can be great for traders, but it turns routine transactions like purchases into risky speculation for the buyer and seller. Investors holding cryptocurrencies for long-term appreciation don’t want to become famous for paying 10,000 Bitcoins for two pizzas. Meanwhile, most merchants don’t want to end up taking a loss if the price of a cryptocurrency plunges after they get paid in it. To serve as a medium of exchange, a currency that’s not legal tender must remain relatively stable, assuring those who accept it that it will retain purchasing power in the short term. Among traditional fiat currencies, daily moves of even 1% in forex trading are relatively rare. As the name implies, stablecoins aim to address this problem by promising to hold the value of the cryptocurrency steady in a variety of ways. The market price of the TerraUSD (UST) algorithmic stablecoin in the early afternoon of May 11, 2022, after it broke its parity peg to the U.S. dollar.

Creating a Stablecoin:

Example 1: Fiat-Backed Stablecoin Development.

The fiat-based stablecoin creation contains the following steps:

• Start with a Plan: You decide to make a stablecoin equal to the US dollar. For every digital coin, you have a real dollar saved.
• Follow the Rules: You talk to legal experts to make sure your stablecoin follows all financial laws, which is crucial for ones backed by real money.
• Choose a Blockchain: Ethereum is your choice because it’s great for making and managing smart contracts, which you need for your stablecoin.
• Write the Code: You create a smart contract that controls how the stablecoin is made and ensures a real dollar backs each coin.
• Keep Your Dollars Safe: You set up a secure way to keep the actual dollar reserves, usually in a bank or with a custody service.
• Go Live: After testing everything to make sure it works right, you launch your stablecoin, getting it to users and on exchanges.

Example 2: Crypto Collateralized Stablecoins

Consider the following steps for creating crypto-collateralized stablecoins:

• Plan Your Approach: You aim to make a stablecoin backed by Ethereum. You’ll need more Ethereum value than the stablecoin value to cover price changes.
• Code Development: You create smart contracts on Ethereum that let users make new stablecoins by locking up their Ethereum.
• Keep It Stable: You add features to adjust the amount of Ethereum needed if its price changes to keep your stablecoin stable.
• Test and Fix: You test your system well to make sure it’s secure and does what it’s supposed to do.
• Launch Time: With successful tests, you release the stablecoin, allowing people to create it by using their Ethereum.

Example 3: Algorithmic (Non-Collateralized) Stablecoins

The non-collateralized stablecoins development contains the following:

• Design the Algorithm: You choose to make a stablecoin controlled by software that keeps its price steady compared to the US dollar by changing how many coins there are.
• Pick a Platform: Ethereum is your platform of choice because it can handle the complex smart contracts needed for your stablecoin to work.
• Smart Contract Work: You write smart contracts that can automatically make more or fewer stablecoins based on their market price.
• Testing Phase: You thoroughly test to make sure the algorithm keeps the stablecoin’s price stable.
• Market Launch: After making sure everything works, you introduce the stablecoin to the market, watching how it performs and adjusting if needed.

What Is the Purpose of Stablecoin?

Stablecoins aim to provide an alternative to the high volatility of popular cryptocurrencies, including Bitcoin (BTC), which can make cryptocurrency less suitable for common transactions.

BACKGROUND OF STABLECOIN.

Stablecoins are digital assets generally designed to maintain
a stable value by linking the value to a national currency or
other reference assets. The term stablecoin does not affirm
that a particular coin actually achieves a stable value. Some
consider terms such as private asset-linked tokens as better
descriptors considering the nature of the instruments. The
top four stablecoins by value (Tether, USD Coin, Binance
USD, and Dai) reached around $128 billion in market
capitalization as of November 10, 2021, according to
CoinMarketCap.
Many stablecoins have different operational structures and

reserve compositions, Reserve assets backing
stablecoins could include fiat currencies, traditional
financial assets, or other digital assets and algorithms.
Many stablecoins at the current stage of development are
primarily used for payments functions to facilitate digital
asset trading and lending. Although stablecoins represent a
small fraction (5%) of the digital asset industry’s total
value, they facilitate more than 75% of trading on all digital
asset trading platforms as of October 31, 2021. Stablecoin-
related policy concerns include issues related to market

integrity, investor protection, financial stability, monetary
policy, payments, and illicit activity prevention.

KEY FEATURES OF STABLECOIN.

Stablecoins are basically cryptocurrencies with the added advantage of a stability mechanism. Therefore, stablecoin traits are quite similar to that of cryptocurrencies. Prior to an overview of the important traits of stablecoins, let us reflect on the general features you can find with stablecoins.

• Privacy

Stablecoin transactions are associated with a random arrangement of characters rather than linking with the identity of the owners. You could not associate the ownership of a stablecoin or related contracts with organizations or individuals. Stablecoins do not have any association with company-related data or individual data, thereby enhancing their abilities to offer privacy.

• Security

One of the most crucial stablecoin features refers to the security they offer. You can store stablecoins in virtual wallets and ensure their security by using a private key. As a result, you can clearly notice that the stablecoin holder only could access the associated funds. In addition, users could also leverage advanced encryption technology for their storage devices to enhance security levels.

• Ease of Usability

Stablecoin holders could use them by newly emerging tools and services that allow faster conversion and exchange of stablecoins into fiat currency. As a result, they can enable funding of currencies directly through a user’s virtual wallet through conversion and exchange solutions.

• No Intermediaries

The lack of intermediaries is one of the significant features of stablecoins. Just like cryptocurrencies, stablecoins remove the fees and limitations that come with governmental control, regulations, and other centralized authorities. However, unlike cryptocurrencies, stablecoin owners have the assurance of protection due to backing against stable assets like fiat currencies.

• Decentralization

Another crucial trait of stablecoins is decentralization, which is one of the basic highlights of a stablecoin design. You don’t have any authority to control the flow of stablecoin. In addition, stablecoin exchange is not restricted to one place, thereby avoiding possibilities of disruptions after malicious hacking attempts. All stablecoin holders in the network have the transaction data stored, thereby ensuring dispersal of transaction data throughout the network.

• Price Stability

Stablecoins keep their value stable. They manage this by tying each coin to something steady, like the US dollar. For anyone thinking about how to create your own stablecoin, keeping its value from jumping around is key.

This stability is attractive whether you’re dealing with fiat-backed stablecoins, crypto-collateralized stablecoins, or even non-collateralized stablecoins.

• Transparency

You need to know what’s going on with your stablecoin. Most stablecoin projects, especially those on platforms like Ethereum, let everyone see how much money backs up the coins. Thus, you can trust that your coins are worth something. If you’re learning how to create a stablecoin on Ethereum, making sure users can see the inner workings is crucial.

• Programmability

Stablecoins can be programmed to do things automatically. This is great for building apps that work on their own, following rules you’ve set up. If you’re planning to create a stablecoin, think about how you can use stablecoin smart contracts to make operations smoother.

StableCoin Market

The total value of all stablecoins is approximately $152 billion as of September 2022, reflecting their growing significance in the digital currency landscape.

Creating Non-Collateralized Stablecoins.

Physical assets do not back non-collateralized stablecoins. However, they use algorithms to stay stable by adjusting their supply according to demand. To build these, you need smart contracts. These automatically carry out actions when certain conditions are met.

You have to design an algorithm that reacts to market trends and adjusts the coin’s supply. Also, building trust with actions like getting audited or setting up community governance can help. These actions can help maintain the coin’s value without needing to back it with other assets.

Developing Algorithmic Stablecoins.

When making algorithmic stablecoins, you need to consider several things to keep the coin stable. The algorithms used have to manage the supply and demand balance well.

However, the development process must ensure there’s enough demand for the coin to maintain its value. These stablecoins need to adapt quickly to market shifts to avoid price changes. Anyway, focusing on these elements can help you to create stablecoins that are dependable for users.

Smart Contracts Implementation on stablecoin.

Implementing a smart contract is crucial for making a stablecoin. It automatically manages transactions based on set rules. This step is vital for keeping the coin stable and reliable.

However, to implement a smart contract correctly, you need:

• The right blockchain platform
• A suitable programming language
• And thorough testing of your code before it goes live.

This approach ensures the stablecoin operates smoothly and remains stable for users.

The Various Forms of Stablecoins.

Source: one trading

As observed, there are several stablecoins, each with their unique approach to ensuring stability in the digital asset market. Whether it’s fiat-collateralized, crypto-collateralized, or algorithmic, these stablecoins aim to provide a stable value for users, making them an attractive alternative to highly volatile crypto-assets.

Fiat-Collateralized Stablecoins: The Traditional Approach

Fiat-collateralized stablecoins utilize conventional assets such as fiat currency or precious metals as their reference asset, with independent custodians and regular audits to ensure security. These stablecoins maintain their value by holding an equivalent amount of fiat currency or precious metals in reserve, providing a stable value that is less susceptible to the price volatility encountered in other crypto-assets. As a result, fiat-collateralized stablecoins offer users a more secure and reliable form of digital asset.

Examples of fiat-collateralized stablecoins include Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD), which are pegged to the U.S. dollar and hold significant market capitalization in the digital asset space. These stablecoins provide users with a store of value and facilitate trades on crypto exchanges, acting as a buffer against the high volatility of other crypto-assets.

Crypto-Collateralized Stablecoins: A Decentralized Method.

Crypto-collateralized stablecoins rely on other crypto-assets for backing and are governed via decentralized platforms and smart contracts. These stablecoins are usually over-collateralized, meaning the value of the crypto-asset held in reserves is greater than that of the stablecoins issued. This over-collateralization is employed to safeguard the stablecoin’s price in the event of a significant drop in the value of the collateral.

MakerDAO’s Dai (DAI) stablecoin is an example of a crypto-collateralized stablecoin. The value of DAI is maintained by locking other crypto assets in contracts as collateral, while the protocol adjusts borrowing and saving interest rates through smart contracts to ensure the stablecoin’s value remains close to $1.

Crypto-collateralized stablecoins offer a decentralized alternative to centralized stablecoins, relying on blockchain technology and smart contracts to manage the stability of their value.

‍Algorithmic Stablecoins: Innovative Price Stability.

Algorithmic stablecoins:

• Utilize sophisticated algorithms to manage supply and uphold a stable value.
• May experience fluctuations due to the absence of central bank credibility.
• Attempt to provide price stability through algorithmic mechanisms that adjust the supply of the algorithmic stablecoin according to the prevailing market price without the need for collateral backing.

However, algorithmic stablecoins can be more susceptible to volatility and loss of peg, as seen in the case of TerraUSD, which experienced a crash in May 2022, thus eliminating its peg to the U.S. dollar. Despite the potential risks associated with algorithmic stablecoins, their innovative approach to ensuring price stability continues to attract interest and development in the digital asset space.

Top Stablecoin Use Cases.

As stablecoins grow in popularity, we’ll explore the most common use cases, and see how this new technology is revolutionizing how we handle our money.

1. On-ramps/Off-ramps:

On-ramps are the platforms you use to purchase and enter the crypto ecosystem, while off-ramps refer to converting digital currencies back to fiat.

Stablecoins bridge traditional finance (TradFi) and decentralized finance (DeFi), and help ease the transition into this new monetary system. While you can use your fiat currency to buy any digital asset, stablecoins are widely supported because DeFi platforms and protocols are confident in their stability.

2. Payments:

Stablecoins can be used to facilitate speedy peer-to-peer transactions and payments. Even microtransactions can be automated through smart contracts, reducing the need for manual intervention. Additionally, stablecoins are highly liquid and can easily be swapped with fiat through various exchange platforms. Alternatively, some consumers use a crypto debit card to purchase real-world goods with stablecoins.

3. Remittances:

Stablecoins can also be used for remittances and cross-border payments. This eliminates the need for third-party institutions, and reduces costs associated with exchange rates and transfer fees. Verification processes are done on-chain, reducing transaction times from days to minutes. Compared with other digital currencies, stablecoins also reduce the risk of price volatility in remittances.

4. Market Liquidity:

Providing liquidity for crypto traders is another popular use case for stablecoins. Stablecoins can be used as one of two currencies that form a trading pair on exchanges. They enable traders to quickly move in and out of positions without opening their portfolios to unwanted risks. As they wait for the next great opportunity, stablecoins provide a mechanism for traders to maintain the value of their assets without needing to off-ramp into fiat. Stablecoins can also be traded globally, giving participants access to new global markets. As of March 31, 2023, the total trading volume for stablecoins has globally totaled over $22bn USD. That is a large increase from the $364 million USD in trading volume of stablecoins toward the end of 2018.

5. Savings:

An underrated but common use case of stablecoins is to hold money as savings. Stablecoins were created to have stable value. Since they have no vesting or lock-in period, users can easily transfer money in and out of wallets, saving and spending when they need it.

For non-traders, stablecoins can also be an alternative to a high-yield savings account. According to the FDIC, savings accounts’ average interest rate is about 1.28%. Stablecoins can offer as high as 8% APY to offset the inherent risks of stablecoins de-pegging and losing value without insurance or government protection.

6. Lending and Staking:

As of February 2023, over $24.5 billion of stablecoins were locked in in the top stablecoins USDC, USDT, and DAI.

Lending and staking provide liquidity to exchanges, institutions, and sometimes even individuals. Unlike Ethereum, stablecoins like USDT and USDC do not use the Proof-of-Stake consensus mechanism, so staking on these platforms is more like a money market deposit than anything else. While these mechanisms yield a larger APY than a savings account, the difference and drawback lie in the lockup or “vesting” period, where you can’t touch or transfer your crypto for a specified time. In effect, you trade off liquidity for the benefit of higher rewards. Proving that more money is lent and staked in DeFi because of stablecoins is a simple matter of looking at the total value locked (TVL) in stablecoin protocols. TVL, after all, refers to the total value of assets vested for lending and borrowing. As of this writing, the top three assets by TVL are all stablecoins: USDT, USDC, and DAI.

7. Gaming:

Gaming dapps account for nearly 30% of decentralized applications on the market. In effect, gaming is another industry ripe for stablecoin adoption.

dAPP review.

Either as in-game currencies or for gambling purposes, stablecoins can bring in-game assets out of the game’s infrastructure and into digital dollars. Stablecoins are used by gaming projects as a means to:

• Monetize in-game currency.
• Create new payment infrastructures.
• Charge commissions on in-game activity.

In doing so, players should be allowed to buy, sell, and trade their earned digital assets on-chain and off-chain. While gaming coins in the past have emerged as a solution to revamp the gaming industry’s economy, none have succeeded in light of high price volatility and lack of interoperability: issues that stablecoins have already resolved.

How Does Stablecoin Work?

Stablecoins attempt to peg their market value to some external reference, usually a fiat currency. They are more useful than more-volatile cryptocurrencies as a medium of exchange. Stablecoins may be pegged to a currency like the U.S. dollar or to the price of a commodity such as gold or use an algorithm to control supply. They also maintain reserve assets as collateral or through algorithmic formulas that are supposed to control supply.

What are the Benefits of StableCoins?

StableCoins offer a myriad of benefits that are reshaping the landscape of digital transactions and finance. Their key advantage is the ability to enable instant exchange of value across a diverse range of entities – from individuals to machines and businesses, streamlining transactions in a way traditional currencies often can’t. This attribute makes them especially useful for transferring value between different cryptocurrency exchanges efficiently, providing a seamless bridge in the digital financial ecosystem. Another significant benefit is their role in mitigating volatility. In the unpredictable world of cryptocurrencies, StableCoins present a more stable alternative. Users often turn to them to 'cash out' from more volatile crypto assets, reducing potential risks and exposure to market fluctuations. This stability not only enhances user confidence but also expands the practical use cases for cryptocurrencies in everyday transactions and investments.

Which Is the Best Stablecoin?

The most popular and largest stablecoin by market capitalization is Tether (USDT).1 It is pegged to the U.S. dollar at a 1:1 ratio and backed by gold reserves. It's also consistently in the top five cryptocurrencies by market cap. You can find Tether on most major crypto exchanges, including Kraken, Binance, and Coinbase.

Challenges of stablecoin in Nigeria.

Stablecoins offer Nigerians faster cross-border transactions and inflation hedging, but their increased adoption may bring long-term risks. A Bank for International Settlements report noted slow, costly, and opaque cross-border payments, with stablecoins potentially offering a solution but posing significant risks to global financial systems. Commissioned by G7 finance ministers and central bank governors, the report underscores the challenges and prospects of global stablecoins and highlights potential drawbacks for Nigeria. the challenges includes:

Weakened monetary policy:

The effectiveness of monetary policies relies on individuals and companies holding balances in the local currency, such as the naira in Nigeria. The report warns that if many people hold their balances in a global stablecoin not controlled by the Central Bank of Nigeria and not tied to the naira, monetary policies could weaken. This effect would be particularly pronounced in Nigeria, given the naira’s instability, potentially exacerbating economic challenges.

Reduction in seigniorage revenue:

Stablecoins could lead to a reduction in seigniorage revenue for countries like Nigeria, where citizens predominantly hold stablecoins instead of the local currency. This loss mirrors the situation in dollarized economies where cash use declines. The G7 warns against stablecoin projects operating without addressing legal, regulatory, and oversight challenges. If stablecoins gain global acceptance, weaker currency countries risk losing control over their domestic currencies, rendering monetary policies ineffective. With the naira’s continuous depreciation, more Nigerians might turn to stablecoins, exacerbating the negative impact on the country’s economy.

Trust and Education:

Many Nigerians are unfamiliar with the concept of stablecoins and cryptocurrencies, leading to skepticism and mistrust. Education initiatives are crucial to fostering trust and understanding among users, demonstrating the benefits and security features of stablecoins.

Exchange Liquidity:

The liquidity of stablecoin exchanges within Nigeria is limited compared to global counterparts, resulting in higher transaction costs and longer processing times. Improving liquidity and market depth is essential to facilitating seamless transactions and enhancing user experience.

Driving Factors for Stablecoin Adoption in Nigeria:

1. Driving Financial Inclusion and Access to Banking Services.

2. Facilitating Cross-Border Payments and Remittances.

3. Mitigating Inflation and Currency Volatility.

4. Empowering Small and Medium-Sized Enterprises (SMEs).

5.Democratizing Investment Opportunities.

The Future of Stablecoins:

Stablecoins are viable in these use cases because their inherent benefits (low transaction costs, instantaneous payment, anonymity, and programmability) support the use cases that currently drive the adoption of this technology. Crypto investors can expect growth in areas such as:

• Payment systems;
• Tokenized markets; and
• Microtransaction facilitators.

While many of these use cases may see mass adoption within the next decade, central bank digital currencies, or CBDCs, are also being put forward as an alternative to stablecoins. CBDCs present themselves as stablecoin alternatives that resolve many of stablecoin’s issues, such as liquidity, operational risks, security, and regulatory challenges. CBDCs will give banks control over the digital currencies issued by central bankers. Finextra’s report suggests that 20% of central banks are interested in issuing a CBDC within the next decade. This push for digital currency, while good for the overall crypto market, calls into question the feasibility of DAO-operated stablecoins over the long run.The ready acceptance of CBDCs means that traditional banks will own a majority share of the stablecoin market once regulations are established. Compliance and legal functions are weak links for newer players like Tether and Circle.

Conclusion.

The arrival of stablecoins has sparked immeasurable interest in the features of stablecoin and how they work. Stablecoins introduced the much-needed stability in the cryptocurrency world to show how crypto can also serve as a vital instrument for financial exchanges. The notable traits of stablecoins have similarities with cryptocurrencies, as you can find decentralization, privacy, and interoperability with dApps. However, stablecoins are different from other cryptocurrencies by the unique pegging mechanism which establishes them as a store of value. Therefore, you can easily notice that the stability mechanism is the most important feature in a stablecoin. As the world opens up gradually to the concept of crypto, stablecoins can serve as a vital push to the adoption of cryptocurrencies. Enterprises can capitalize on the element of trust due to stability and discover new ways for digital transformation with crypto.

REFERENCES:

https://webisoft.com/articles/how-to-create-a-stable-coin/

https://101blockchains.com/key-features-of-stablecoins/

https://www.deltecbank.com/news-and-insights/the-history-of-stablecoins/

https://www.investopedia.com/terms/s/stablecoin.asp

https://www.bitcoinmarketjournal.com/stablecoin-use-cases/

https://stablecoin.com/

https://Mfonisovel.meduim.com