One of the more exciting developments in the world of crypto casinos in recent years has been the slow but steady rise of stablecoin gambling.
Stablecoins like Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are becoming popular choices for gamblers, in some cases even outpacing the use of Bitcoin and Ethereum.
What are stablecoins and what makes them so attractive in the eyes of iGaming players? Are there any downsides to this type of cryptocurrencies? Let’s find out in this brief guide to stablecoin gambling.
What are Stablecoins?
Stablecoins are a type of cryptocurrency that are pegged to a more stable asset, typically a fiat currency like the US dollar, the euro, or commodities like gold. This pegging mechanism ensures that the value of the stablecoin does not experience the same levels of volatility as other cryptocurrencies like Bitcoin and Ethereum.
The stability is achieved through various methods, depending on the type of stablecoin, of which there are three distinct categories:
1. Fiat-collateralized stablecoins. These are the most common type of stablecoins, backed one-to-one by fiat currencies (e.g., USD, EUR) held in reserve. For every stablecoin issued, an equivalent amount of the fiat currency is kept in a bank account as collateral. This straightforward approach provides a high degree of price stability for stablecoins like Tether (USDT) and USD Coin (USDC).
2. Crypto-collateralized stablecoins. As the name implies, these stablecoins are backed not by fiat currencies but by other cryptocurrencies. Because the reserve cryptocurrency can also be volatile, such stablecoins are often over-collateralized to absorb price fluctuations. An example of a crypto-collateralized stablecoin is MakerDAO’s Dai (DAI), which is pegged against the US dollar but backed by Ether.
3. Algorithmic stablecoins. Unlike the previous two, algorithmic stablecoins are not backed by any collateral. Instead, their stability is maintained through working algorithms that control the supply of the stablecoin, expanding or contracting it in response to the market situation. This type is more experimental and can sometimes be subject to significant volatility if the underlying mechanisms do not work as expected.
The infamous TerraUSD (UST) is a perfect example of an algorithmic stablecoin gone wrong. (Don’t worry, we’ll get back to UST later.)
Stability Meets Gambling
Now that we’ve figured out how stablecoins operate, it’s not hard to see why casinos and players may feel a certain way about using stablecoins in gambling.
The main selling point is the predictability they bring to the value of your wagers. By virtue of being pegged to a stable or semi-stable asset, these coins prevent your potential winnings from decreasing in value due to market volatility. Compare that to Bitcoin gambling, where your bets are subjects to all kinds of minute-to-minute fluctuations even in the best of times.
This also means that tax reporting is simpler compared to other, highly volatile cryptos, which is always a plus for iGaming enthusiasts.
Sheer LUNAcy: The TerraUSD Saga
The aforementioned TerraUSD (UST) represents an intriguing chapter in the story of stablecoins. Unlike its more common counterparts, UST’s value was maintained through a complex mechanism tied to its sister token, Luna. The design of UST aimed to stabilize its price around $1 USD through an algorithm that adjusted its supply based on changes in demand.
When the price of UST deviated from the dollar, the system encouraged users to either burn Luna to mint more UST (when UST was above $1) or burn UST to mint Luna (when UST was below $1). This process was intended to bring UST’s price back to parity with the USD through market dynamics and arbitrage opportunities.
For a time, TerraUSD and its creator, Do Kwon, enjoyed good press and the image of “stable crypto done right”. The coin gained significant attention for its innovative approach to maintaining price stability without direct collateral.
The skepticism it faced – mainly about the potential risks associated with TerraUSD’s reliance on algorithmic processes rather than tangible assets – was largely brushed aside. In May 2022, however, the concerns were fully realized when UST dramatically lost its peg to the dollar.
Efforts to restore the peg by burning UST and minting large amounts of Luna flooded the market with Luna, causing its price to plummet. As Luna’s market value eroded, it further diminished the confidence in its ability to back the UST peg, leading to a vicious cycle of declining prices for both tokens.
At the height of the crisis, UST fell to a low of around $0.30, far below its intended $1 peg, while Luna, which was trading at over $80 in early May, crashed to mere fractions of a cent by mid-May.
The rapid devaluation erased nearly $40 billion in market value for holders of UST and Luna. This event not only devastated investors but also sparked widespread debate about how not all stablecoins are created equal and that the viability of algorithmic stablecoins may have been overestimated.
The Future of Stablecoins in Gambling
Thankfully, the trust in stablecoins as a whole has not eroded. The integration of asset-collateralized coins into the gambling sector offers the same tried-and-true benefits of blockchain technology — security, transparency, and speed — while avoiding the volatility typical of traditional cryptocurrencies.
Nearly 99% of the stablecoin market is dominated by USD-denominated stablecoins, which not only means global acceptance but also translates into even less volatility. The US dollar is widely regarded as the world’s primary reserve currency. As such, stablecoins pegged to the USD inherit these qualities.
The recent developments, such as advanced blockchain technologies like Layer 2 solutions, enhance functionality even further by reducing transaction costs and increasing processing speed.
While stablecoins as they are right now represent but a small portion of the digital gambling, their unique attributes make them ideal posterboys for crypto iGaming. As the market matures and regulations evolve, stablecoins like USDT, USDC and BUSD will undoubtedly begin to shape the industry.
One of the best sources of the latest news and developments surrounding the crypto gambling market is the official Mr. Gamble forum about crypto casinos. It is a true marketplace of ideas where casino brands and players can meet and share their suggestions, concerns and stories.