Stablecoins are cryptocurrencies whose value is linked to another currency, commodity, or financial instrument. Stablecoins seek to provide an alternative to the high volatility of the most popular cryptocurrencies, such as Bitcoin (BTC), which has rendered crypto investments unsuitable for everyday transactions.
The first stablecoin was issued in 2014. They have gained popularity since then because stablecoins provide the speed and security of a blockchain while eliminating the volatility that most cryptocurrencies experience.
Stablecoins were primarily used to purchase cryptocurrencies on exchanges that did not support fiat currency trading. Government-backed currencies not backed by commodities such as gold or silver are referred to as fiat currency.
Stablecoins are now used in various blockchain-based financial services, including lending platforms, and can even be used to pay for goods and services.
Stablecoins are blockchain-based versions of fiat currencies that can interact with blockchain-based applications and smart contracts (which are self-executing agreements written in code).
The Incredible Value of Stablecoins
Stablecoins are intrinsically stable assets, making them an excellent token of value and encouraging for use in everyday transactions. Stablecoins also facilitate the movement of crypto assets within the ecosystem.
Most stablecoins are pegged to the value of either a specific fiat currency, such as the US dollar, or a specific commodity, such as gold. Because they are pegged, their prices are fixed, so one stablecoin tracking the US dollar should be worth one dollar.
This peg can be kept in place via a variety of mechanisms. Asset backing is the most common method used by stablecoins. The total amount of stablecoin tokens in circulation concerning the number of assets backing is referred to as asset backing. A stablecoin is backed 1:1 if assets are worth an equal amount for every stablecoin in circulation.
Stablecoins backed by US dollars retain their value as long as the stablecoin is redeemable for US dollars. If its value fluctuates sharply in either direction, traders looking to profit from price differences between markets will step in to close the gap.
What is the Purpose of Stablecoins?
Stablecoins can now be used to lend at higher rates than traditional savings accounts or to take out cryptocurrency-backed loans in the decentralised finance (DeFi) space. While stablecoins may offer higher returns than traditional savings products, it is essential to note that stablecoin offerings do not include government-backed insurance.
Stablecoins are widely used in the DeFi space and on exchanges and have been issued on various blockchain networks that support smart contracts. Blockchain networks that support smart contracts enable the creation of applications such as decentralised exchanges (DEXs). Decentralised exchanges are marketplaces where traders conduct transactions directly with one another.
Stablecoins can also be used to pay salaries in cryptocurrency because they reduce the cost of transferring money across borders. Only a transaction fee is required to move funds on the blockchain. Furthermore, cross-border transactions settle faster on the blockchain, taking anywhere from a few seconds to an hour, depending on various factors. These factors include the network type, potential congestion, fees paid, and transaction complexity. However, cross-border transactions may take several days to settle in the traditional banking system.
According to Bitsoft 360, the actions of controlling authorities such as central banks ensure that the prices of government-issued fiat currencies remain relatively stable. Stablecoins use the stability provided by central banks and the government to generate reserves in government-backed fiat currencies like the US dollar. Some funds backing stablecoins are allocated to fixed-income securities such as short-term corporate debt and government-backed debt obligations to monetise stablecoin reserves, ensuring the funds remain redeemable and adequately backed.
Advantages of Stablecoins
They bring the stability of fiat currencies to the blockchain, which means they are more secure and transparent versions of fiat currencies that can interact with blockchain-based applications.
Stablecoins can be used as a currency and are less expensive to exchange than traditional fiat currencies. They are also accessible through a network of applications that offer higher yields than traditional savings accounts. Stablecoin holders can also take out loans backed by their coins or purchase insurance to protect their crypto assets on blockchain-based applications.
Stablecoins also facilitate quicker and cheaper cross-border payments and can be easily traded for fiat currencies on exchanges because they are highly liquid and widely accepted on trading platforms.
Commodity-backed stablecoins make precious metals and other commodities more portable and divisible while retaining their reserve value. Gold, for example, can be used as a medium of exchange and even lent out to earn interest using these stablecoins.
Stablecoins seek to provide an alternative to the high volatility of popular cryptocurrencies such as Bitcoin (BTC). Stablecoins provide a less expensive and faster alternative to payment processing and international remittances, resulting in the first real-world application for digital assets.
Stablecoins are cryptocurrencies whose market value is tied to some external reference. As a medium of exchange, stablecoins outperform more volatile cryptocurrencies. Stablecoins seek price stability by holding reserve assets as collateral or employing algorithmic formulas designed to control supply. Stablecoins continue to be scrutinised by regulators, owing to the $153 billion market’s accelerated growth and potential to disrupt the broader financial system. Therefore, we can expect to see more hype around stablecoins in the future.