What are Stablecoins? | Unraveling Stablecoins in NZ (2025)

Stablecoins represent a specific class of cryptocurrencies designed to ensure price stability, employing various mechanisms such as pegging their value to other assets like currencies, commodities, or cryptocurrencies, or algorithm-based supply.

Within the cryptocurrency sphere, New Zealand users require a secure and steady digital asset to facilitate more efficient transactions and investments. Simultaneously, individuals participating in the New Zealand fiat currency system seek a currency that safeguards their wealth against inflation and financial exclusion.

Bitcoin

, being the most well-known cryptocurrency

, has faced significant price volatility, which can be concerning for routine transactions and everyday use. For instance, its value soared from just under $5,000 in March 2020 to over $63,000 in April 2021, only to experience a subsequent decline of nearly 50% in the following months.

To address this issue, stablecoins have emerged in the crypto market. These cryptocurrencies, with a focus on stability, aim to maintain a steady value using various methods. Stablecoins are particularly relevant to the New Zealand crypto landscape, where individuals are keen to explore digital currencies while ensuring stability.

Stablecoins, as the name suggests, seek to tackle this challenge by offering methods to maintain a consistent value for the cryptocurrency they represent.

Presently, Stablecoins command a collective market capitalization of $100 billion, signifying their significant presence. Their utilization spans across various purposes, including cryptocurrency trading, earning interest through Decentralized Finance (DeFi)

applications, and safeguarding wealth from the volatility of local currencies.

Crypto-Collateralized Stabelcoins

With the rising popularity and adoption of cryptocurrencies, the number of individuals holding crypto assets has surged significantly. This growing trend has led to an increased interest in utilizing cryptocurrencies as collateral to generate Stablecoins.

The process of collateralizing and issuing Stablecoins with crypto assets is relatively straightforward. Kiwis can deposit their crypto into a stablecoin vault, such as MakerDAO

, and then generate Stablecoins, such as DAI, against the value of their collateral.

As the loan is repaid and the collateral is withdrawn, the corresponding amount of Stablecoins, such as DAI, is removed from circulation. Individuals can tap into the value of their assets while retaining ownership and potential long-term appreciation.

Fiat-Collateralized Stablecoins

Currently, dollar-pegged stablecoins dominate the stable digital currency landscape, enjoying immense popularity. These stablecoins maintain a 1:1 value ratio with the US dollar, as they are backed by actual dollar reserves

Tether (USDT)

emerged as the initial digital dollar stablecoin to achieve widespread acceptance and has now become ubiquitous across various cryptocurrency exchanges.

Traders extensively utilize Tether and other widely recognized digital dollars like USDC. These Stablecoins offer the convenience of swiftly transferring funds between crypto wallets, ensuring funds are readily available for seizing market buying opportunities, or easily converting them back to NZD dollars when desired.

Algorithmic Stablecoins

Algorithmic Stablecoins differentiate themselves from reserve-backed models like Tether and Maker. Instead of relying on reserves of collateralizing assets, algorithmic stablecoin protocols actively participate in the open market by buying and selling their token.

A famous example is Terra’s USD. They utilizes a distinctive mechanism that encourages arbitrage activities involving USD and Terra’s LUNA token. In cases where USD exceeds the $1 peg, the stabilization mechanism of the protocol initiates a swap where $1 worth of LUNA is exchanged for $1 of USD. TerraUSD has collapsed and is now worth $0

For New Zealanders, several stablecoins are readily accessible and widely used. Here, we'll examine some of the most significant players, including a critical look at NZDD.

New Zealand Digital Dollar (NZDD)

NZDD is a stablecoin pegged 1-to-1 with the New Zealand Dollar (NZD), issued by EC Holdings Ltd. (associated with Easy Crypto NZ). Its primary goal is to provide a digital representation of the NZD on the blockchain, offering a local stable asset for Kiwis. Each NZDD token is reportedly backed by an equivalent amount of NZD held in a local bank account, with attestation reports conducted by Ernst & Young and smart contract audits by Trail of Bits.

Advantages:

• Local Peg: Direct peg to the NZD removes foreign exchange risk for New Zealanders.
• Transparency: Claims of 1:1 backing with regular audits provide a degree of trust.
• Ease of Access: Seamless integration within the Easy Crypto NZ platform for local fiat on/off-ramps.

Critical Look (My Opinion): While the concept of a local stablecoin is appealing, NZDD currently faces significant challenges regarding its on-chain utility and liquidity. As discussed previously, attempts to swap even moderate amounts of NZDD on decentralized exchanges like Uniswap often reveal a severe lack of liquidity for trading pairs beyond perhaps NZDD/USDC. This limits its use in active DeFi participation, making it less versatile than global stablecoins.

Its primary utility seems confined to the Easy Crypto ecosystem for cheaper internal transfers or as a stable holding within that specific platform. The question of whether an international user would choose NZDD over globally recognized stablecoins is telling – the answer is likely no, due to its limited interoperability and liquidity outside the NZ market.

Tether (USDT)

USDT is the largest and oldest stablecoin by market capitalization, pegged to the US Dollar. It was launched by Tether Limited in 2014 and is widely used across virtually all cryptocurrency exchanges and DeFi platforms. USDT is a fiat-collateralized stablecoin, meaning each token is supposedly backed by an equivalent amount of USD reserves, though its backing has been a subject of controversy and scrutiny over the years.

Advantages:

• Unparalleled Liquidity: The most liquid stablecoin, making it easy to trade in and out of.
• Widespread Adoption: Available on numerous blockchains and exchanges globally.
• Extensive DeFi Integration: A cornerstone of the DeFi ecosystem, used in countless protocols.Considerations:
• Transparency Concerns: Historically, Tether has faced criticism regarding the full transparency and composition of its reserves.
• Centralization Risk: As a centralized issuer, Tether is subject to regulatory risks and potential censorship.

USD Coin (USDC)

USDC is another major US Dollar-pegged stablecoin, co-founded by Circle and Coinbase through the Centre Consortium. It is known for its strong regulatory compliance and transparency, with monthly attestations of its reserves published by independent accounting firms. USDC is backed 1:1 by USD held in regulated accounts.

Advantages:

• High Transparency & Compliance: Widely regarded as one of the most transparent and compliant stablecoins.
• Strong Liquidity: Second only to USDT in terms of liquidity and adoption.
• Reliable Backing: Backed by fully reserved assets held in segregated accounts.Considerations:
• Centralization Risk: Similar to USDT, USDC is a centralized stablecoin, subject to issuer control and regulatory actions.
• US-Centric: While globally adopted, its peg to the USD means it carries US dollar-specific economic risks.

Dai (DAI)

DAI is a decentralized, crypto-collateralized stablecoin pegged to the US Dollar, issued by the MakerDAO protocol. Unlike USDT and USDC, DAI is not backed by fiat currency in a bank account but by a basket of other cryptocurrencies locked in smart contracts. It maintains its peg through a system of overcollateralization and economic incentives.

Advantages:

• Decentralization: Governed by the MakerDAO community, reducing reliance on a single centralized entity.
• Transparency: All collateral and operations are on-chain and publicly verifiable.
• Resilience: Designed to be more resilient to censorship and single points of failure.Considerations:
• Complexity: The mechanism for maintaining its peg can be more complex to understand.
• Collateral Risk: While overcollateralized, extreme market volatility could theoretically impact its peg.

Binance USD (BUSD) - Note: Phasing Out

BUSD was a US Dollar-pegged stablecoin issued by Paxos Trust Company in partnership with Binance. It was regulated by the New York State Department of Financial Services (NYDFS) and was known for its strong regulatory oversight and transparency. However, due to regulatory actions, Paxos ceased minting new BUSD in February 2023, and Binance has announced plans to gradually phase out support for BUSD. While it was a significant stablecoin, its relevance is diminishing.

My Insight: The phasing out of BUSD highlights the dynamic and often unpredictable regulatory landscape surrounding stablecoins. It serves as a reminder that even well-established stablecoins can face challenges, emphasizing the importance of diversification and staying informed about regulatory developments.

There isn't a single "best" stablecoin for everyone in New Zealand. The optimal choice depends on your specific needs and risk tolerance:

• For DeFi & Global Trading: USDC and USDT are the clear winners due to their unparalleled liquidity and widespread adoption. USDC is often preferred for its higher transparency.
• For Decentralization: DAI is the top choice for those who prioritize decentralization and on-chain transparency, though it comes with its own set of complexities.
• For NZD-Pegged Stability (within a specific ecosystem): NZDD is suitable if your primary goal is to hold a digital asset pegged to the NZD and you plan to operate mainly within the Easy Crypto ecosystem. However, for broader DeFi use, its lack of liquidity is a major drawback.

✔️Safe Haven: Stablecoins offer a safe haven for users in the volatile crypto market. Unlike highly volatile cryptocurrencies like Bitcoin or Ethereum Stablecoins maintain a stable value, typically pegged to a fiat currency such as the US dollar or even NZD Dollar.

✔️Borderless Payments: One of the key advantages of stablecoins is their ability to facilitate borderless payments. Traditional cross-border transactions often involve high fees, delays, and the need for intermediaries such as banks. Stablecoins, on the other hand, operate on blockchain networks, enabling fast, secure, and cost-effective transactions.

✔️DeFi and Digital Ownership: Stablecoins play a crucial role in decentralized finance (DeFi)

ecosystems. Users can leverage tokens to access a wide range of DeFi protocols, including lending and borrowing platforms, decentralized exchanges

, and yield farming.

❌Centralization: Stablecoins such as USDT and USDC, which are backed by the US dollar, are administered, audited, and issued by centralized reserve bank entities. However, any scrutiny or controversy surrounding the parent company, as observed in the case of Tether, poses a risk to the entire crypto ecosystem due to interdependence.

❌Security Concerns: Collateralized Stablecoins rely on custodians to securely hold the underlying collateral assets. This concentration of risk introduces vulnerabilities, making algorithmic Stablecoins comparatively advantageous. Nevertheless, algorithmic Stablecoins may face the challenge of being under-collateralized.

❌Lack of Transparency: Since most Stablecoins are operated by centralized entities, a significant portion of their activities, including their backing, occurs off-chain. This opacity complicates the process of determining whether a stablecoin is fully backed, and obtaining clear answers can be challenging, leaving uncertainties in the minds of users.

Stablecoins are an indispensable part of the modern cryptocurrency landscape, and their importance for New Zealanders will only continue to grow. They offer a vital blend of stability and digital flexibility, making them essential for both seasoned traders and newcomers to the crypto space.

While global stablecoins like USDC and USDT dominate in terms of liquidity and utility, the emergence of local options like NZDD is a welcome development. However, for NZDD to truly compete, it must address its on-chain liquidity and expand its use cases beyond a single platform. Until then, most New Zealanders will likely find more utility in the established global stablecoins for their DeFi and trading needs.