Stablecoins Promise More Stability, Savings and Faster Payments
Stablecoins are fintech industry’s latest attempts at globalizing a digital currency which doesn’t fluctuate based on supply and demand. This is because they allow for secure, convenient transactions with similar volatility to traditional fiat currencies. The real potential for these currencies is huge, exposing holders to USD or another fiat currency and helping to create a global infrastructure for stable payments, savings and interconnect the world. There is decided need for a global currency for a global economy.
Many fintech experts have taken this as a sign that there will be an entire ecosystem based around stablecoins in the next few years. If you’re still new to stablecoins and how they are modernizing the financial world, here is a quick guide:
Purpose of Stablecoins
The purpose or goal of stablecoins is to provide a non-volatile, Blockchain-based payment mechanism. Stablecoins are therefore considered by many cryptocurrency experts to be a bridge to the adoption of digital currencies by person’s new to crypto.
Stablecoins are adding significant value to merchants who are interested in crypto as a payment method, with the added assurance that the coins they received will still have the same value tomorrow, or a month from now. Furthermore, stablecoins often conform to know-your-customer (KYC) and anti-money laundering (AML) requirements, which helps merchants keep a record of their business transactions.
Types of Stablecoins
There are multiple types of stablecoins being developed with varying purposes and uses.
The most common types of stablecoins are collateralized, or backed by fiat currency such as the USD, EUR, or GBP. Then there are others that are set up to hold their stability using an algorithm.
The first type of stablecoin is backed by fiat currency reserves. These stablecoins are usually operated as a trust, and hold in escrow the amount of fiat currency equivalent to the amount of coins in circulation. Anyone holding the stablecoin can redeem it for an equivalent of Fiat currency which it backs, and this fact keeps the price relatively stable.
The second type of stablecoin is crypto-collateralized, backed by reserves which are held in various cryptocurrencies such as ETH or BTC.
Then there are stablecoins which are non-collateralized, where the supply is governed by an algorithm using smart contracts to provide stability. In essence, these tokens rely on an algorithm which is able to change the supply volume, interest rate and other factors so as to maintain the stability of the token’s price.
Examples of Widely Used Stablecoins
The first stablecoin to get wide adoption was Tether (UTSD), which was backed by reserves of USD and was designed to be pegged 1 to1 to the dollar. USDT was surrounded by controversy and lack of trust, and lost its peg to the dollar multiple times. However, it is still the most widely used stablecoin today, and as reported by CoinDesk, USDT volume has surged to an all-time high, led by Chinese traders.
TrueUSD (TUSD) and Paxos (PAX) are other examples of price-stable cryptocurrency backed by US Dollars. Each 1 TUSD and PAX is redeemable for $1.00 USD, functioning similarly to Tether.
MakerDAO is the protocol behind the stablecoin DAI, widely adopted by the Decentralized Finance community, and it aims to maintain a 1:1 peg to USD. DAI is backed by Ether. The Collateralized Debt Position (CDP) is a notable concept that has been in development since 2014 by the MakerDAO project. With the CDP, users can deposit assets into a smart contract as loan collateral, and once the deposit is complete, the user can generate some amount of DAI to borrow. The CDP has mechanisms to monitor the price of ETH, and if the loan to value of the CDP falls below a certain threshold, the borrower needs to add more ETH, or some of it will be liquidated.
Stablecoins are bringing a measure of stability to the blockchain which is good for issuers, merchants and token holders alike. With these stablecoins, the future value is assured by the connection of the coin to a fiat currency such as the US Dollar, while maintaining the speed and verification abilities needed for transactions.
Stablecoins are the fintech industry’s latest attempt at globalizing digital currencies, and are leading the world into a new era of digital currency use. The potential for these currencies to be used across industries such as cross-border payments, lending and to protect the public from national currency issues such as inflation, fraud and corruption will be invaluable. Since the original launch of Tether, many other projects with differing use-cases have emerged and undergone development and created better processes than their predecessor.
Will stablecoins be the ones to lead the mass adoption of crypto?