- Stablecoins are aimed at bridging the gap between the stable nature offered by a fiat currency or stable assets and benefits of cryptocurrencies.
- Backed by interchangeable assets like precious metals, art pieces or real estate, commodity-collateralized stablecoins hold the real value of tangible assets.
- Since stablecoins' value is pegged to an asset having fixed or stable value, these coins offer low volatility against the world's national currencies.
Currently, governments, businesses and corporations depend on centralization when it comes to technology solutions. The centralized approach to manage the digital solution is not wrong, but blockchain technology can offer a way to create an accountable and transparent system. Decentralization is aimed at creating a trustless and fair ecosystem across different industries.
The blockchain revolution started with the emergence of cryptocurrencies. However, digital currencies are struggling to be adopted globally due to extreme volatility with randomly fluctuating prices. People believe that it’s still in its nascent stages and there’s a long way to go before it becomes a viable medium of exchange.
The concept of stablecoins has been introduced to overcome the existing volatility in the cryptocurrency market. As the name indicates, stablecoins are cryptocurrencies pegged to an asset having stable value, for example, fiat money or gold. Tether (USDT) is a stablecoin backed by US dollars with a stable value, equivalent to USD 1$ for every USDT coin.
What are stablecoins?
Stablecoins are aimed at bridging the gap between the stable nature offered by a fiat currency or stable assets and benefits of cryptocurrencies.
What if you pay $50 for lunch today and the same amount would be worth $70 tomorrow. Small investors cannot afford to handle that kind of volatility. Stablecoins can resolve such issues by offering the next level of stability.
Now, the question is, why do you need fiat-backed cryptocurrency when you have fiat currency. It is because cryptocurrencies do not require centralized authorities for bringing trust in the system, reducing extra costs. Cross-border payments can also be made quickly with minimal transaction fees. Backing a cryptocurrency with stable assets or fiat currency can bring more value among users.
Here are the different types of Stablecoins
Stablecoins can be categorized basically into four types:
- Fiat-backed Stablecoins
- Cryptocurrency-backed Stablecoins
- Commodity-collateralized Stablecoins
- Non-collateralized Stablecoins
Fiat backed stablecoins are pegged to the value of a particular fiat currency. Such tokens have a fixed value at 1:1 ratio. TrueUSD is a stablecoin, which has been pegged 1:1 to the US dollar. The stablecoin issuer deposits the fiat currency as collateral to assure the existence of fiat-backed stablecoin.
Therefore, stablecoins need an auditor and financial custodian to examine that the token remains collateralized.
Cryptocurrency-backed stablecoins work like a fiat-backed stablecoin, except that the issuer keeps the cryptocurrency as collateral instead of a fiat currency.
Since a cryptocurrency backs it, people don’t need to worry about the volatility issue as these coins use a security pledge to neutralize the cryptocurrency’s volatility to be used as collateral.
For example, Ethers can be kept as collateral for launching a cryptocurrency-backed stablecoin.
Backed by interchangeable assets like precious metals, art pieces or real estate, commodity-collateralized stablecoins hold the real value of tangible assets.
Such commodities can gain value over a specific timespan and offer an increased incentive to coin holders to use and keep these coins. Commodity-collateralized stablecoin holders can invest in precious metals or real estate properties using their coins.
Usually, investment in such commodities is only restricted to wealthy investors. However, stablecoins offer investment opportunities for investors globally.
Based on the concept of Seigniorage shares system, non-collateralized stablecoins rely on the algorithm that changes the supply volume for controlling its price.
non-collateralized stablecoins are sold if its price is found to be low than pegged currency and more tokens are minted and supplied if the value increases above the pegged currency using smart contracts.
Types of stablecoins mentioned above indicate that plenty of reasons exist why should someone issue and invest in stablecoin. Let’s discuss its benefits in a detailed way.
Benefits of Stablecoins
- Low Volatility
Since stablecoins’ value is pegged to an asset having fixed or stable value, these coins offer low volatility against the world’s national currencies. Unlike other cryptocurrencies, stablecoins leverage the benefits of decentralized technology without volatility issues.
- Protection from local currency crashes
If the value of a fiat currency crashes, local citizens can exchange the crashed currency for fiat-backed or asset-backed stablecoins before they lose savings. Using this approach, people will not have to suffer drops in the value of local fiat currency.
- Affordable emittances for migrant workers
Currently, migrant workers have to transfer payments via platforms, such as Western Union to send money to their loved ones living in other countries. The whole process is expensive and time-consuming due to which people lose a specific chunk of funds.Though cryptocurrency is the best solution to solve these issues, the sudden rise and drop in value by 20-30% is one of the biggest reasons that make it a non-ideal solution.
On the other side, stablecoins can be an ideal alternative to this issue as families and their workers can transfer stablecoins having a fixed value using their digital wallets with no volatility and low fees.
Because stablecoins have started getting a lot of traction, many companies have come up with stablecoin development services to create a stablecoin backed by a specific asset for enterprises and startups.