Although cryptocurrencies are embryonic, having great potential to excel, their volatility & constant price fluctuations are few reasons which create friction with the crypto market. After all, a currency is useful only when it can provide a good store of value and unit of account. Balance is a requisite in both cases! As a result, the avidity to bring stability in the cryptocurrency market is growing continuously, which should now be fulfilled through the implementation of ‘stable coins.’
Stablecoins are a different type of cryptocurrencies pegged to a stable asset or real-world assets such as fiat like USD, CNY, RUB, etc. and at times gold or oil, to keep their value stable, unlike ETH or BTC which keeps varying in USD every time. This doesn’t mean that the other cryptos like ETH, BTC or LTC are not fit for trading. But they will not give you the insouciant experience while investing or receiving. Stablecoins will allow people to take advantage such as sending money quickly at cheap fees & creating economies around smart contracts.
Types of Stablecoins
Fiat-collateralized – They are the simplest and offers 100% price stability. But there’s a need to have audits to make sure right amount of collateral is being held. Example – Tether and TrueUSD.
Crypto-collateralized – Well, they have much better liquidity and are more decentralized and transparent. But they are not as stable as fiat-collateral, and there’s inefficient use of capital. For example – MakerDAO.
Non-collateralized (Seigniorage shares) – Here no collateral required and they aren’t pegged to any currency as well. They are complex, unknown how resilient a coin is to devaluation, and they will require an increasing demand for coins in the near future. Example – Basis.
Reasons to prefer a stable coin
Trading in the Capital Markets – Ousting our current financial ecosystem, without the need for a third party is a significant enticement of mass adoption of cryptocurrencies. In the existing traditional financial market, cryptocurrencies are not yet expedient as a method of exchange, concerning the risks that arise due to the volatility of coins.
Lower Inflation Rates – Coins with lower inflation have a higher purchasing power. When inflation rates of currency are too high, spending decreases and Growth Domestic Product (GDP), or the monetary measure of the market value of all the final goods and services produced in a period quarterly or yearly, shrinks.
Price Stability – Government and people will continue to view cryptocurrencies as a skeptical asset and be hesitant about using it for daily transactions. This is a major reason why the market needs to delve into the possibilities of a stable coin.
Mainstream Adoption of a Dew decentralized Internet – Applications which are built on the cryptocurrency protocols are hard to adopt. No one is ready to take any risk. But if a fiat-free, price-stable currency existed, it will be a greater vicissitude in the crypto sphere.
Hence, decreasing the friction between crypto and fiat financial systems will ingress to new kinds of crypto-assets and opportunities, critical for projects and companies. A reliable stablecoin will enable comprehensive use cases on the blockchain, and also provide the long-term stability required for financial functions such as loans and credit. The most promising application for stablecoins is their utility as on-ramps for assets moving from traditional financial markets into crypto.