Understanding The Concept Of Stablecoins And Why They Are Important?

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Cryptocurrencies are steadily becoming the next big thing in the market with more than 5000 coins already out there. In no time this number will increase to 10000 and then there would be thousands of crypto coins in the market. Although, there’s no way that all of these would get the same amount of attention and most of them would only suffer failure. Like you can see, almost 90% of crypto coins developed till now is a failure with only 100 to 500 seems to survive the market. Among these coins are some successful stablecoins projects like Tether that maintained a good reputation in the market. In this article, we are going to know more about the concept of stablecoins and see how they are important for our economy. So, let’s get started with it right away.

What Is The Concept of Stablecoins?

The thing about stablecoins is that it is pegged to fiat currency. For example in the case of Tether, the cost of 1 Tether = 1 USD. As you can tell by its name, stablecoin is a cryptocurrency that is stable in value. Unlike Bitcoin and other cryptocurrencies whose prices keep on changing every day, the stablecoin has a stable value equal to its backed fiat currency. 

This is the reason stablecoin is taking the world by storm because it doesn’t suffer from the issue of Volatility like other cryptocurrencies. Also, because of this, it is said that Sablecoins has the potential to become the universal currency.

Different Types Of Stablecoins

The definition we provided above covers only a type of stablecoins i.e. fiat-backed stablecoin. When these stablecoins were created, it got the attention of the world although they are not perfect either. Given below are the various types of stablecoins:

Fiat Backed Stablecoins

Fiat backed stablecoin

Stablecoins indeed come over the issue of volatility but now it has to deal with the issue of centralization. The need for these stablecoins to be kept equal to the value of its fiat currency, makes it dependent on central authorities again. Now, what’s the whole point of a cryptocurrency which is not decentralized at all and if we still have to trust a third party.

This is why two more types of Stablecoins came into existence that is crypto-backed Stablecoin and gold-backed Stablecoin. Some of the top fiat-backed stablecoins are Tether (USDT), USDCoin and Maker. All these coins are backed with US dollars and can be used to purchase used as a store of value or for trading in cryptos.

Crypto-Backed Stablecoins

As the name tells itself, these types of stablecoins are backed by other cryptocurrencies. The idea behind the creation of crypto-backed stablecoin is simple i.e. to maintain the decentralized nature of cryptocurrencies. If stablecoins would be crypto-backed then everything would still be on blockchain and no central authority would need to maintain the stability of fiat-backed stablecoins. But what about volatility? Aren’t we again where we started from? Cryptocurrencies were volatile which is why stablecoins were created. Now if we’ll peg stablecoins with cryptos, wouldn’t it make it even more volatile? 

Asset-Backed Stablecoin

These types of Stablecoins are pegged with assets like gold so that the value of it remains stable. The example of one such cryptocurrency is G-coin in which 1 G-Coin = 1 Gram Gold. This gives us the ability to store digital gold, use it as a store of value or as a digital payment method like other cryptocurrencies.

Why Stablecoins Are Important?

Cryptocurrencies have come far beyond, from when it was created but it still needs more adoption and support to grow. The reason digital currencies are not getting all the value it should is that people are not able to trust it and there are other issues surrounding the industry like regulatory confusion etc. The ability of cryptocurrencies is constantly questioned due to its volatility and it is the reason it can’t take place of cash yet. 

For instance, if we take the example of paying employees with cryptocurrencies like Bitcoin or Ethereum. Can you imagine what will happen? It would be more like a lottery than an actual payment because the value of your salary would fluctuate every minute and day. If you are being positive, you can wake up as a millionaire one day but if we consider its negative scenario, you can find yourself out of money also if the value of cryptocurrency crashes. Moreover, using these cryptocurrencies for purchasing small things like a cup of coffee can cost you a lot due to price fluctuations.

Considering all the above-mentioned issues it is important for the crypto industry to develop a coin that is free of all these price fluctuations and can be used for daily purchases. The concept of Stablecoins seems to fit in this scenario as they are backed with reliable and stable assets like USD, Gold etc.

What Qualities An Ideal Stablecoin Should Have?

The concept of stablecoins is to provide the world with a better digital alternative of cash which people can trust and use for daily purchases. The qualities a stablecoin should possess in order to replace cash are:

  • Stable in value and free from market volatility
  • Serve as a convenient payment method
  • Enables low-cost transactions
  • Be a scalable option
  • Should be decentralized
  • Maintain the privacy of users
  • Should be able to withstand regulatory and other global changes

These are the qualities that will make a stablecoin perfect to use for daily use and replace cash and other costly alternatives.

Conclusion

After all these years, people are still having a hard time accepting cryptocurrency as an actual payment option which is due to many reasons but mainly because of its volatility. Bitcoins and altcoins volatility are what is stopping them from being the next universal payment instrument. To encounter the issue of volatility came the concept of Stablecoins but it still has to improve to be the ideal digital payment tool for the world.

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