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Key Takeaways

Centralized stablecoins like Tether (USDT) and USD Coin (USDC) have been the cause for some concerns in the crypto market. However, that may be changing with the rise of algorithm-based stablecoins according to analysts at Bloomberg Intelligence.

In BI’s latest Crypto Outlook Report, the analysts make a strong argument for the edge that decentralization gives algorithmic stablecoins over regular stablecoins. This is because the former, by not being issued by a centralized body, is highly regulation-resistant.

Algorithmic stablecoins, while still relatively new in the crypto industry, are proving to be better at overcoming the flaws that other stablecoins carry over from the traditional finance world – censorship and seizure by regulators.

“While still in relative infancy, the rise of decentralized  Stablecoin alternatives are addressing one of the industry’s potential choke points — helping the sector buffer against future disruption,” the report stated.

Regulations are needed to increase the adoption of fiat-backed issuers of stablecoins like USDT and USDC, especially by the banking sector. However, regulatory scrutiny could be a threat to “open and permissionless protocols of DeFi,” the analysts added.

At the back of the founding principles of blockchain technology and cryptocurrencies is the need to have a permissionless financial system. 

While stablecoins have reached a market cap of over $183 billion per data from CoinMarketCap, the issuers of fiat-backed stablecoins have often gotten a bad rep. Tether, the issuer of USDT for instance, has often been called out for a lack of transparency of the collateral backing of its treasury and faces constant perils from regulators.

This is why algorithmic stablecoins, by being uncollateralized, are providing a viable alternative to regulatory concerns. The algorithm or protocol underlying these stablecoins acts as a “central bank,” removing all middlemen from the equation.

The crypto market seems to be recognizing this as well as the sector has seen a massive uptick in value, the report noted. Terra USD (UST), which is issued by the Terra protocol, surged 5,323% year over year in 2021. UST rose from a market cap of around $0.2 billion to reach $10.7 billion at the end of 2021.

Similarly, DAI, which is issued by Maker DAO, jumped 791% YOY in 2021. Combined, DAI and UST helped algorithmic stablecoins account for about 17% of the TVL of stablecoins.

Meanwhile, USDT, the market-leading stablecoin saw its share of the stablecoin market drop by more than 50%. Although USDC saw a significant increase in its market share, the report asserted.

Bloomberg Intelligence remains highly bullish for all stablecoins regardless. Stablecoins, along with Bitcoin and Ethereum, are among the only crypto innovations that Bloomberg Intelligence expects to stand the test of time.

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