But first, what are stablecoins?
Stablecoins are a type of cryptocurrency specifically created to have stable values at all times. They are coins whose value depends on an external asset in order to maintain a stabilized price.
Why are they so popular?
- Certain advantages in terms of stability
Stablecoins offer many advantages that other cryptocurrencies also provide. The only main difference is that they are considered more stable, as the name indicates. That means that their values don’t typically fluctuate as much as in the case of other cryptocurrencies.
- Many investors consider them ‘less risky’
In a risky market where prices are going up and down constantly, it is of extreme importance to have an asset pool where the investments are not subjected to this instability. Of course, this is not important just for the traders but also for the retailers who wish to safely transact using cryptocurrencies without the risk of falling into a fluctuation pothole.
These coins make alternate ways of trading for crypto-traders who do not want to lose their investments on real currencies by being pretty useful to keep profits at the FIAT range. After all, the world’s day-to-day most used currency is still not Bitcoin, but FIAT. For now, at least.
- They are tied to real-life assets
Many stablecoins are fixed to common FIAT currency, such as USD or JPY. Some of them are fixed to commodities, like Silver and Gold.
- They fit well into the vision of DeFi
They are strong candidates to have a critical role in DeFi in the future. DeFi (Decentralized Finance) provides an alternative to existing financial systems that are built on publicly available blockchains. This concept has been praised a lot recently for its ability to apply a variety of interactions and new ways of managing finances, such as P2P loans. Stablecoins will undoubtedly play a vital role if DeFi continues its growth, because people will need a volatility-free tool to trade with each other without losing their earnings on cryptocurrencies.
Types of stablecoins
There are many types of individual stablecoins out there and we can divide them into three distinguishable categories:
- Centralized Stablecoins Supported by FIAT
These are backed by fiat currencies stored in bank accounts in a strict one-one ratio. For example, USD Coin (USDC) is currently valued at $1.0000007, with other examples being Tether (USDT), Gemini USD (GUSD), etc. All are fixed on USD but provide variations. These stablecoins are exclusively centralized because they are created and managed by companies, banks, or even governments which are also centralized entities themselves.
- Decentralized Stablecoins Powered By Crypto
These are not connected to a central operator. In fact, it is a relatively new type of stablecoins that is managed by the consensus of users involved in the network and is relatively new. Users need to lock in a certain amount of cryptocurrency as collateral to receive the coin, which is again fixed with a real currency.
- Decentralized Algorithmic Stablecoins
This category is newer than the others. These stablecoins do not have any guarantees that support their system. And they rely solely on various algorithms to ensure price stability.
How will stablecoins influence Bitcoin adoption?
Some economists believe that with usage of stablecoins, which also work on blockchain technology, will pull people into buying more Bitcoin as being the primary parent entity to them. The current irritating long-term fall on BTC’s price indicates that if there were a shift from real currencies towards digital ones in the stock market pretty soon, serious global companies would get their hands into BTC for core applications.
The idea of trading USD on a digital scale, through cryptocurrencies and via their own decentralized networks appeals to many companies because this would make the market more secure. The prevention of fraud and money laundering will be easier to achieve and this will overall create a cleaner and more stable environment for businesses around the globe.
This is why many investors count on cryptocurrencies to solve the current problems of our financial system. And with Bitcoin being the most “stable” cryptocurrency that is not a stablecoin, the symbiotic relationship between these two seems to be inevitable.
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