Stablecoins are talked about in the crypto community. It is difficult to predict the success of these assets at the moment, but their potential is too great to be ignored. Read in my article their application in the real world.
What are stablecoins
There are 180 UN-recognized currencies in the world. They are used to buy goods and services and, despite exchange rate fluctuations, inflation and other factors, are generally stable. Thus, countries can use them for calculations.
Stablecoins are digital money that mimics the properties of fiat (traditional) currencies. As a rule, they are pegged to the dollar or euro exchange rate (usually in a 1: 1 ratio), gold or other assets, including cryptocurrencies.
Today, stablecoins are the most common instruments for fixing the balance. Examples of such coins are USD Tether (USDT), True USD (TUSD), Paxos Standard (PAX), USD Coin (USDC), and Binance USD (BUSD). However, there are examples of the other two aforementioned types that are currently available on the market. Bitshares USD and DAI are crypto-backed coins, while Carbon and the (now defunct) Basis are examples of the algorithmic type.
This list is far from complete. The market for stable digital currencies is quite wide, as evidenced by the proliferation of hundreds of projects wishing to promote their own stablecoin.
Here are just a few options for using stablecoins:
- day-to-day financial transactions;
- optimized recurring payments and card-to-card transactions;
- fast and affordable transfers for migrant workers;
- protection against hyperinflation and market volatility;
- improved exchange of cryptocurrencies and a decrease in the impact of bitcoin on the market.
What are the disadvantages of stablecoins?
Stablecoins pegged to fiat currencies are centralized, meaning they are managed by a single entity. To maintain trust and maintain reputation, regular audits are required. An example is the history of Tether: according to rumors, the volume of the cryptocurrency issue exceeded its supply with real assets, and the project management became a figurant in the investigation of the US Department of Justice.
In addition, if a stablecoin is backed by a traditional currency, it is subject to all applicable legal restrictions. For example, Facebook's cryptocurrency was pegged to several world currencies, which increased its appeal and applicability. However, the project caused such dissatisfaction with regulators that its leadership abandoned pegging to several currencies, distanced itself from Facebook, and the project was renamed.
Risks of the collapse of the fiat currency rate
Stablecoins are less liquid than regular cryptocurrencies. This is especially true for coins tied to commodity markets. To get your gold bar, you will have to make a trip to the vault.
Fiat-pegged stablecoins are vulnerable to a collapse. Suffice it to recall the fall in the value of the British pound in 1992 or the ruble in 1998. If a stablecoin is backed by such a currency, its rate will fall along with it.
Even if a coin is pegged to a cryptocurrency, it can also depreciate along with the exchange rate of the base currency. In addition, crypto-backed stablecoins are the most difficult and therefore risky asset.
The future of the blockchain seems uncertain, but stablecoins can help spread cryptocurrencies. The largest players in the financial market are already studying their possibilities, and government bodies are formulating the rules for the circulation of digital coins. It is difficult to predict the success of these assets at the moment, but their potential is too great to be ignored.
While stablecoins have some drawbacks, they are a critical component of the cryptocurrency market. Thanks to various mechanisms, they can keep a fixed price. Share your opinion in the comments below! If you wanna learn more or know more you can contact my team or you can jump into a one-on-one call with me right now clicking one of the the below buttons.
He uses to dedicate part of his life to inspire others and help them achieve the most out of their lives. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He is Member of Institute of Directors in London, Member of Changer Club in Riga, Member of Fintech Association of Hong Kong, Member of Singapore Fintech Association, Member of Non Executive Director Association in London and Member of Alumni Network of Draper University in San Francisco. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.
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