Stablecoins: A reliable store of value amidst crypto market volatility

Over the last few years, Stablecoins have grown in popularity. Stablecoins play an important role in the crypto world.

Stablecoins

Stablecoin is a cryptocurrency that maintains price stability by pegging its monetary value to a given fiat currency often the US dollar. Unlike highly volatile cryptocurrencies the price of stablecoin is fixed and does not fluctuate. Top stablecoin includes Tether (USDT), USD Coin (USDC), Binance (BUSD) and Dai (DAI).

Types of Stablecoins

The high price volatility of cryptocurrencies led to the emergence of the concept of stablecoins. Types of stablecoins are

  • Fiat-backed stablecoins: Fiat-backed stablecoins offer an easy-to-understand approach as their price is pegged to the value of a particular fiat currency (e.g. US dollar, Euro, etc).or a basket of fiat currencies. As of today, the most popular versions of fiat-backed stablecoins are based on the US dollar. The popular fiat-backed stablecoins are USD Tether (USDT), USD Coin (USDC).
  • Commodity-backed stablecoins: Commodity-backed stablecoins are backed by a commodity or a basket of commodities. They are often used as a means of investment rather than means of payment. 
  • Crypto-backed stablecoins: Crypto-backed stablecoins are backed by a single cryptocurrency (eg Bitcoin, Ethereum, etc) or by a basket of cryptocurrencies. These types of stablecoins are over-collateralized as cryptocurrencies regularly show a high degree of price volatility.
  • Algorithmic stablecoins: Algorithmic stablecoins use a complex algorithm to manage the peg to a reference asset by automatically adjusting the supply and demand of the stablecoin. They do not require any reserve to be held, as their value is managed through the control of tokens in circulation.

Use Cases of Stablecoins

Stablecoins have potential to revolutionize the international payment system. While most stablecoins are mainly used at crypto exchanges. Let’s explore the use cases of stablecoins.

  • Retail payments: Why should there be a need for a stablecoin for retail payments when there are already dozens of electronic payment alternatives? The answer is that electronic payment alternatives rely on the banking sectors while stablecoins do not need banks for making payments. Stablecoins process their payments through their own blockchain or through one of the existing blockchains, Which means it is easy to develop a retail payment system without having to rely on banks. A mobile phone and internet connectivity are sufficient for making payments.
  • Online payments: Stablecoins allows online payment with peer-to-peer networks. It enables 24/7 availability and borderless payments. In future, it is possible that stablecoins could challenge existing digital means of payment. Stablecoins have faster settlement times and cheaper international transactions are likely to translate into wider adoption.
  • Machine-to-machine payments: In the future industry M2M payments would require new innovative payment solutions. Machines equipped with sensors can be enabled through smart contracts to trigger orders of material and release payment of goods without minimal human intervention. This will reduce the need for a third party and reduce settlement delays and costs.
  • Cross-border payments: Since stablecoins are underpinned by blockchain technology their operation for payment would be 24/7. Stablecoins have faster settlement times and cheaper international transactions are likely to translate into wider adoption.

Top Stablecoins

  • Tether (USDT): It is the world’s first stablecoin and the largest by market capitalization. Pegged to US dollar one-to-one basis and can be backed by a diverse mix of assets.
  • USD Coin (USDC): It is the second-largest stablecoin by market capitalization, pegged to Us dollar one-to-one basis and can be backed by US dollar assets.
  • Binance USD (BUSD): It is third largest stablecoin by market capitalization pegged to US dollar one-to-one basis and can be backed by equal amounts of US dollars and treasury bills.

Related: Consensus Mechanism: Joining Forces for a Decentralized Future

Conclusion

Stablecoins play an important role in the crypto world. The high price volatility of cryptocurrencies led to the emergence of the concept of stablecoins, which aims to maintain price stability by pegging its monetary value to a given fiat currency often the US dollar. Unlike highly volatile cryptocurrencies the price of stablecoin is fixed and does not fluctuate.

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