A currency, whether it’s a US dollar or a DogeCoin, acts as a medium of exchange as well as a method of storing value in an economy. In the real world, the capacity of a currency to maintain its value is a must-have quality. In the world of cryptocurrencies, however, this is not the situation. BTC (bitcoin) surged from $5,940 to more than $19,190 between mid-November and the middle of December 2017, before falling to below $6,900 by the beginning of February. It has recently increased from less than $12,000 in August 2020 to more than $44,000 in August 2021, representing a significant increase.
Bitcoin, Ethereum, and other digital currencies often see 10% increases or decreases in value in a 24-hour period, or even on an intraday basis. A currency with such huge fluctuations does not imply a stable currency. As such, they are more closely related to speculative trading items such as derivatives, which are attractive to speculators but unsuited for broad use.
This has sparked serious doubts about the long-term sustainability of popular cryptocurrencies as a reliable store of value or a medium of exchange. In the cryptocurrency world, stablecoins are a new kind of cryptocurrency that seeks to provide price stability as well as a constant value.
If it is to be used as a medium of exchange or a store of wealth, a model crypto-coin should maintain its buying value and experience very little inflation, just enough to encourage people to utilize the coins rather than hoard them as a means of saving money.
Stablecoins strive for this ideal behaviour.
Given the fact that bitcoin operates on a global scale and is not overseen or controlled by a central authority (such as a central bank), it is often considered to provide the best of both worlds. It combines the security, anonymity, and decentralization of a cryptocurrency with the low volatility of fiat money to create a hybrid currency. Currency that was linked to an underlying asset, such as gold, was historically considered the most stable. Today, there aren’t any. The gold standard was abolished in the United Kingdom in 1931, and the United States followed suit two years after that.
The United States dollar has taken the place of the gold standard in modern times. There are at least 14 currencies that are connected to the United States dollar. The countries that issue them depend on the value of the dollar to prevent the value of their own currencies from suffering levels of volatility that would be detrimental to their own economies.
A similar strategy is used by stablecoins to achieve little or no volatility by being tied to price-stable assets such as the US dollar or gold. Different stablecoins achieve price stability via a variety of different methods.
What are stablecoins?
In the cryptocurrency world, stablecoins are digital currencies that have a set value that are typically tied to a major fiat currency, such as the US dollar, a basket of fiat currencies, or exchange-traded commodities, such as precious metals, to maintain their value.
Stablecoins are a kind of cryptocurrency that is relatively new to the market and whose goal is to offer price stability. Stablecoins have grown in popularity as a result of their efforts to combine the best of both worlds: the fast processing, security, and anonymity of cryptocurrency payments, as well as the stable values of fiat currencies that are not subject to volatility.
Stablecoins are a much-needed antidote to the price instability that has characterized the cryptocurrency exchanges. Stablecoin currencies, like fiat currencies, are collateralized by an underlying asset, which is often the item that it digitally duplicates, in order to offer the same price stability as fiat currencies.
Tether (USDT) is a stablecoin that is backed by the US dollar 1:1. It is backed by the US dollar. Tether Ltd., which is owned by the founders of the cryptocurrency exchange Bitfinex, is meant to put aside and retain $1 for every single unit of USDT currently in circulation, according to the company’s mission statement.
In recent years, both the quantity of stablecoins accessible and the value of those coins have risen significantly. The availability of crypto assets connected to other fiat currencies, such as the euro, as well as other crypto assets is quite easy to come by!
Stablecoins are classified into four types:
- Stablecoins with Fiat Collateralization
- Stablecoins that are backed by commodities
- Stablecoins that have been cryptographically collateralized
- Stablecoins that are not collateralized
This innovative technology seems to have an almost infinite number of potential applications. Some stablecoin projects have connected their digital assets to gold or other cryptocurrencies, while others have linked their digital assets to fiat currency.
Here are some of the advantages stablecoins offer!
Ease of access
Stablecoins are very easy to acquire and can be found on the majority of cryptocurrency exchanges, including Binance and Coinbase, for a little fee. The short version is that they offer cryptocurrency investors with welcome liquidity and a safe haven, and they are an important component of the digital assets market.
Stablecoins are accepted world-wide
Despite the fact that new stablecoin-focused legislation is always being touted as being on the horizon, they are nevertheless allowed by authorities across the globe owing to their high level of compliance with financial regulatory requirements in many cases. Stablecoins unquestionably served as a model and playbook for central bank digital currencies, which are now in widespread use (CBDC).
The best of both worlds
Stablecoins are changing the cryptocurrency market by combining the best of both worlds. They have many of the same features as other blockchain-based currencies, such as transparency and security, but they also differ in that they lack the volatility that characterizes almost every other cryptocurrency.
Significant demand and a large market capitalization
Stablecoins have already exceeded the $120 billion milestone in terms of market capitalization. Because they are not influenced by the volatility of the bitcoin market, they can bring a new viewpoint to the table when it comes to the environment. All other forms of money, including stablecoins, operate in the same way that they do.
Ease of transaction
Stablecoins are now utilized in nearly every cryptocurrency transaction, and this is expected to continue. Stablecoins enable you to pay for your meal by scanning a QR code and using bitcoin as payment. Businesses all around the globe are embracing cryptocurrencies, with stablecoins serving as a new and secure payment method to facilitate this adoption. Because to stablecoins, we are now able to utilize cryptocurrencies in the manner in which they were originally designed.
Stablecoins that have gained widespread adoption are readily accessible. A wide range of industrial giants, e-commerce behemoths, information technology behemoths, and global economies have backed stablecoins. In a broad variety of financial services, stablecoins and cryptocurrencies have great potential, and they are already being used. Unquestionably, stablecoins have been beneficial to millions of families all over the globe.
Ease of Trade
Investing in stablecoins is the most risk-averse method of making money via cryptocurrency trading. During times of high volatility, trading stablecoins may provide profits in excess of 30 percent annual percentage rate (APR). While this may not seem to be much in contrast to the gains promised by cryptocurrencies, stablecoins carry practically no risk since they are backed by the government.
The reason behind this is that all you have to do to make money is sell one dollar for more than one dollar and buy one dollar for less than one dollar. Yes, it seems to be too good to be true, yet stablecoin premiums and discounts are accessible in many countries across the globe. A $1 stablecoin may be bought for as low as $0.95 and sold for as much as $1.05. The price of a $1 stablecoin can range from $0.95 to $1.05. That’s a 10 percent return on a $1 transaction, which is impressive.
Safe Haven Asset
Stablecoins are digital assets whose value is designed to remain stable over time. It is because of this characteristic that stablecoins are considered to be excellent safe haven assets. In contrast to cryptocurrencies such as Bitcoin, the value of which can fluctuate dramatically on a daily basis, an individual storing value in stablecoins faces no risk of loss, particularly if they have complete custody of their assets. In recent months, the importance of stablecoins’ price stability and self-custodial nature has been emphasized by Venezuela’s political and economic upheaval, in which many people leaving the country have retained their assets in Bitcoin to avoid seizure of their fiat currency.
Cross Border Payments
Paying and remitting money across borders is a legitimate problem that many foreign workers face when trying to transfer money back home after work. Transferring money internationally is a costly endeavour. Typical migrant workers in Asia, for example, send home about $200 per month, but they must pay $12 in international transfer costs, which amounts to half a day’s income for many
Stablecoins have made a significant difference in the lives of millions of people in developing countries. Employers in industrialized areas of the globe are progressively relocating their workforce to other countries in pursuit of better prospects and higher-paying job opportunities. They are often need to send money back to their family and loved ones, which necessitates the use of remittance services like Western Union. In practice, this may be a time-consuming and expensive process. Workers are often compelled to bear excessive expenses as well as the loss of valuable time in order to provide for their families.
As a result of stablecoins’ rapid transfers and low transaction fees, workers and their families in many parts of the globe are able to use digital wallets and get stablecoins in a short period of time. To top it all off, international freelancers may be allowed to receive payments in stablecoins at the moment. Because the global remittances industry is valued at about $800 billion, stable coins provide a significant potential.
Gateway to DeFi
As more businesses and organizations, as well as countries and economies across the globe, incorporate cryptocurrencies into their business models and international transactions, it is possible that cryptocurrency could ultimately replace fiat currencies. With the introduction of DeFi products such as Crypto ETFs, Tokenized Stocks, and NFTs, among others, as well as the growth of the DeFi sector, we may soon find ourselves in a world where the asset is used to enhance our lives rather than harm them.
Decentralized blockchain-based systems have the potential to replace conventional banking systems because they provide faster transactions, better security, cheaper costs, smart contracts, money digitization, and other advantages over traditional banking systems. Because to decentralized finance, we can already take out loans, earn interest, get great returns on our assets, borrow money, lend money, and do a variety of other things with only an internet connection and a phone in our hands..
Overall, stablecoins have a plethora of real-world use cases, the majority of which revolve around cryptocurrency mass adoption, potential as a daily currency, enabling fast and affordable remittances for migrant workers and freelancers, and protection from local currency crashes and market volatility.
Stablecoins bring a lot to the table, and it won’t be long until they’re universally acknowledged as global money. With a market cap of over $120 billion and a daily trading volume of $52 billion, it is not a matter of if, but of when Stablecoins will overtake other currencies throughout the world. Stablecoins are the real-world equivalent of what cryptocurrencies were created for; nevertheless, they are tied to centralized currencies. We can only speculate on how cryptocurrencies will impact the world once the market stabilizes. However, until that utopian goal becomes a reality, we may make do with Stablecoins. What are your thoughts? Stablecoins are incredible, aren’t they?