Top Preferred Stablecoins in India: Why They Are Rising in Popularity

2021/12/15 11:24:50

Over the recent years, stablecoins have been making their mark in the highly volatile and unpredictable cryptocurrency market, acting as a more secure bridge between traditional fiat currencies and digital currencies. They offer an attractive alternative for crypto-curious investors to get started in the world of cryptos, without worrying about the high levels of uncertainties the typical cryptocurrencies are subject to, which can cause a reversal of fortunes at a moment’s notice for investors.

Stablecoins are designed to overcome the key drawbacks of volatility cryptocurrencies are notorious for by being pegged to external, conventional assets such as fiat currencies or commodities like gold. This helps their users benefit from price stability mechanisms put in place by the power of the underlying blockchain technology and smart contracts even as they enjoy the speed and convenience of crypto technologies.

Stablecoins have also been rising in popularity thanks to the DeFi movement which has really taken off in 2021. According to a recent study by PYMNTS.com, stablecoins were the second most preferred form of cryptocurrencies in use among multinational companies around the world. The study found that 57.6% of MNCs are using at least one kind of crypto, with Bitcoin being the most popularly used option at 31%, followed by stablecoins at 29%.

Over the last week of November 2021 alone, stablecoins crossed the $150 billion market cap mark, based on data from CoinGecko. By mid-December, the total market capitalization of stablecoins exceeded $163 billion, growing by nearly 10% in less than a month. While Tether (USDT) remains the market leader in this space as the fourth-largest cryptocurrency by market cap, USD Coin (USDC) has also seen remarkable growth in recent weeks. USDC recently overtook Ripple (XRP) to become the seventh-largest crypto by market cap. In addition, the soaring demand for another stablecoin - Terra USD (UST) propelled Terra (LUNA) into the top 10 list recently.

However, it’s not just the world over, but also in India where they are turning increasingly attractive options to invest in and buy into among crypto traders. Before we deep dive into this, let’s take a look at their benefits and what are the reasons behind their stellar growth in market cap and popularity.

Benefits and uses of stablecoins

Stablecoins offer the benefits of traditional fiat currencies to help traders get on-ramps to cryptocurrency trading. Designed as a medium of exchange or a store of value that can maintain its purchasing power and not be affected severely by inflation and other factors, stablecoins are a great starting point for investors of all levels to enter the crypto market without worrying about the risks of high volatility.

In addition, they offer all the benefits of cryptocurrencies, including decentralization, high levels of security, anonymity, and cheaper transactions, all with the added benefits of low volatility as they are backed by or pegged to more stable assets. For many new investors, volatility and unpredictability are the key factors keeping them away from exploring cryptocurrencies. This is especially true for larger, institutional investors who are unwilling to take such high levels of risk in trading.

However, stablecoins offer a secure way for them to enter the market and reap the benefits of cryptocurrency and digitization with far fewer risks. And this is evident from the PYMNTS.com survey with Circle we referred to in the previous section of the article.

The success of stablecoins is one of the key reasons several nations are exploring the creation of CBDCs (central bank digital currencies) - a secure way to digitize fiat currencies and leverage cryptocurrency technology. From a macroeconomic perspective, stablecoins have the power to digitize economies at a faster pace than is possible within the traditional banking infrastructure. According to Harvard Business Review, stablecoins enable faster, cheaper, more secure ways of transferring payments and have the power to provide banking services to users who do not have access to a bank account. This could potentially help governments distribute financial aid and stimulus in a more reliable and corruption-free manner to those who need it the most.

But where stablecoins have truly made their mark so far and forged ahead in popularity is in the world of decentralized finance. Operating across multiple blockchains and DeFi protocols, stablecoins offer users a way to earn from their crypto holdings by offering liquidity. Stablecoins are in high demand for fundraising as they are protected from volatility. DeFi projects let users lend or invest their stablecoins to generate profits in a decentralized and efficient manner. The explosive growth of DeFi has resulted in the creation of one of the biggest use cases for this asset class and continues to support its growth in the crypto market.

Now that we’ve discussed what makes stablecoins so appealing as an asset class, here’s a look at the most popular ones in use among Indian crypto traders.

Tether (USDT)

Tether (USDT) is the most popular stablecoin traded on crypto exchanges not only by Indian traders but the world over as well. The ERC20 token is based on Ethereum's blockchain and offers the highest levels of liquidity among all stablecoin classes. As a result, it is also effective in maintaining its peg to the value of the US dollar, making it more reliable as an option for DeFi users.

USDT Real Volume

Source: messari.com

Indian crypto traders prefer to purchase USDT via P2P and trade it against other leading cryptocurrencies across leading DEXs and CEXs. Its popularity ensures that USDT is accepted and supported by nearly all of the leading decentralized projects and crypto exchanges, making it the perfect base to buy, sell and exchange other crypto assets.

In India, owing to the high demand for USDT, its value in INR remains quite high even if the USD to INR exchange rate falls in traditional finance markets. The price of the USDT stablecoin fluctuates based on demand and supply as its mechanism strives to maintain its peg to the USD. When it comes to Indian markets and crypto exchanges, limited liquidity and availability cause a higher number of buy orders than sell in the market, a sign of tight supply. This keeps the value of the USDT high, despite which Indian traders continue to accumulate and opt for Tether for use in day trading, DeFi, and other use cases.

A recent article by CoinDesk reveals how the price of USDT crashed against the INR in late November over concerns that India was planning to introduce regulations to ban private cryptocurrencies. However, several Indian crypto traders remained unfazed by the news and used it as an opportunity to 'buy the dip' instead, sending USDT/INR rebounding higher in a span of a few hours.

DAI (DAI)

The DAI stablecoin by MakerDAO is one of the most established and preferred choices among DeFi users in India. What sets it apart from most of the other leading stablecoins is that it is backed by cryptocurrencies instead of fiat currencies. It is a multi-collateral token backed by multiple assets which help it maintain price stability even through times of high uncertainty and volatility in the crypto market.

As one of the leading DeFi platforms worldwide, MakerDAO has generated considerable interest among crypto investors in India as well. What makes DAI more attractive is that it is truly and completely decentralized, unlike Tether which has in the past been mired in controversy owing to centralized control and its failure to be backed by actual US dollars.

Several leading crypto exchanges are seeing the potential of offering DeFi yields to users on their platform, further driving up the demand for these digital assets.

Binance USD (BUSD)

Binance USD (BUSD) is another popular stablecoin in use among Indian crypto traders. Most actively traded on Binance, BUSD is available for trading on more than 100 different markets, enjoying a high trading volume despite a decline in market cap caused by the ongoing rout in the crypto market lately.

It is one of the most popular digital assets used in yield farming, giving users the ability to earn rewards in the token as a way for passive income generation. What makes BUSD so popular is that it works across three of the leading blockchain networks that support DeFi projects - Ethereum, Binance Smart Chain and Binance Chain. Users also have the option to swap their holdings between these chains, giving them more use cases for their BUSD holdings.

Binance Smart Chain is ever-expanding its ecosystem of DeFi apps, giving users yield farming capabilities and letting them earn in BUSD and several other leading cryptocurrencies. Like Tether, Binance USD is also an ERC20 token based on the Ethereum blockchain. It enjoys high levels of interest among cryptocurrency traders in India as it is highly regulated and has received approval from the New York State Department of Financial Services (NYDFS).

USDC

Like Tether, USD Coin (USDC) is also an ERC20 token that is pegged to the value of the US dollar. However, where it differs from USDT is that USDC is backed by USD reserves, in a mix of cash and short-term US Treasury bonds. As a result, it claims to enjoy higher levels of regulation by leading financial authorities.

Coinbase collaborated with Circle to become co-founders to the CENTRE Consortium, the group responsible for managing the USD Coin. Indian crypto users like the use of USDC as a means to buy and trade cryptocurrencies on leading exchanges worldwide. While it does not enjoy as high a level of liquidity as that of Tether, it is still just as convenient and possibly offers greater security owing to being backed by real-world assets.

The USDC is a highly versatile stablecoin that can run on several leading blockchain networks beyond Ethereum, including Solana, Algorand, Tron and Hedera Hashgraph. As a result, it offers much promise in the DeFi space, as Ethereum and Solana are among the leading ecosystems that support dApps in this space.

In addition to retail crypto traders, USDC also offers a convenient way for businesses in the fintech space to conduct digital transactions involving large sums of money in a cost-effective and fast manner. Another big reason behind the uptick in demand for the USDC is Visa’s recent decision to start accepting card payments using this crypto - a significant mainstream use case for the stablecoin.

Terra USD (UST)

A relatively new entrant in the scene, Terra USD (UST) has been making its presence felt in the highly competitive crypto market lately, as its adoption has been on the rise among DeFi projects. The UST stablecoin varies vastly from most of the other leading coins in this space as it is backed not by US dollars but by smart contract algorithms and the native token of the Terra blockchain, LUNA.

UST Market Cap Soars on Rising Adoption

Source: UST/INR chart, coingecko.com

The algorithms maintain the price stability and keep the UST's value pegged to that of the US dollar by burning or minting LUNA tokens, based on the rise and fall in demand for the stablecoin. In recent weeks, both UST and LUNA have surged in market cap and have seen a considerable uptick in trading volumes over increased demand for the stablecoin among crypto traders worldwide.

While the level of adoption of UST is far lower in the Indian market, given that the number of crypto users in India is significant in number, it is only a matter of time before it rises in popularity in keeping with the worldwide trend.

Beyond DeFi, UST's adoption is also on the rise as it is fast becoming acceptable among businesses that support crypto payments. Using a PoS consensus mechanism, UST boasts far fewer gas fees and transaction processing times than the ERC20 stablecoins, giving it another solid advantage.

Following a major network upgrade in October, the demand for Terra's ecosystem and tokens have been steadily rising, especially with the widespread adoption among Web3 projects. Several crypto experts have also given it the term 'DeFi Dollar', which makes it one of the most interesting and trending stablecoins to monitor in the coming months.

Opportunities Ahead

The DeFi market is still in nascent stages across India and has room for considerable growth in the coming months. This could, in turn, power a surge in the demand for the leading stablecoins and offer a real opportunity for the growth and development of new stablecoins in the crypto market. However, any significant uptick in the adoption of cryptocurrencies in general and stablecoins, in particular, will depend solely on how the Indian government plans to regulate this sector. A conducive regulatory atmosphere is key to driving up adoption and could support the entry of institutional investors and mainstream businesses into the crypto market in India going forward.