Role of Stablecoins in Crypto space
By Susmith Karan
In today’s digital age, it is not uncommon for people to have a few thousand dollars — or even hundreds of thousands — worth of cryptocurrency holdings. The problem is that with the volatility in crypto prices, your money can disappear just as quickly as it came. Most investors are looking for a way to keep their investments safe while still generating returns, and stablecoins seem like an attractive option.
What is a stablecoin?
A stablecoin is a cryptocurrency that has low volatility against the world’s “traditional” currencies such as USD, GBP or EUR. The reason for this low volatility is that stablecoins can maintain a fixed price by being pegged to said traditional currency. This pegging can be done through several methods which can vary in their effectiveness.
One method to maintain price is by having a transparent and fixed algorithm that adjusts the money supply as needed.
For example, if the price of a stablecoin like Tether (USDT) starts to rise too high compared to USD, it will issue new coins and use those coins to purchase other tokens on the market, making their value fall. This makes the value of USDT drop, thus bringing it back to $1.
Another example is using a smart contract that automatically converts tokens back to the traditional currency they are pegged to if their price drops below a certain threshold. For instance, if Tether’s price drops too low, then people can sell their Tethers for US dollars through the Tether platform’s smart contract.
There are currently many different stablecoins that have been created by new organizations, projects and exchanges. Some examples of these projects include Tether (USDT), TrueUSD (TUSD), USD Coin (USDC) and Gemini Dollar (GUSD). There are also others like Paxos Standard Token (PAX) which is run by the exchange it is pegged to.
Benefits
There are several benefits that stablecoins offer people who use them, making them very popular compared to standard cryptocurrencies. For one thing, price volatility can be a huge danger for traders and investors since prices can go through the roof or the floor in just a matter of days. This makes it hard to use cryptocurrencies for everyday transactions such as buying groceries since you never know how much your money will actually be worth by the time you reach the store.
Stablecoins, on the other hand, offer an easy way to keep your money safe and still generate returns because they are not subject to price fluctuations. This makes them great for any financial situation, whether it be paying bills, buying groceries or even getting an education.
Potential concerns
With these benefits in mind, there are also several issues that stablecoins face including price volatility and regulation. The main issue with stablecoins is the fact that they need to have all of their tokens pegged to a certain currency which, in turn, makes them subject to that currency’s value.
For example, if all of Tether’s tokens are pegged to the US dollar, they lose money if the price of USD suddenly drops by even 1%. This is because their prices will be off compared to their assets and they won’t know how many tokens they need to issue to make up the difference.
For stablecoins to become a trusted payment method, they will have to solve all of these issues and more. Luckily, there are already projects working on finding solutions that can help stablecoins improve their effectiveness.
The future looks bright for stablecoins thanks to the work of entrepreneurs and blockchain-based companies.
One such company called Stronghold is creating a new stablecoin that will be pegged one-for-one with the U.S. dollar and backed by federally insured bank deposits in FDIC-insured banks. This means that every token issued will be directly tied to an actual USD, making them very safe to use.
One of the biggest things that stablecoins have going for them is their legal backing. This gives them an extra layer of security since most governments are not looking to completely ban cryptocurrencies altogether.
This means that, as more people start using cryptocurrency and governments begin banning certain types , they will be one of the few that stay in business while still being able to adhere to the law.
Revolutionize currency markets
Stablecoins have huge potential for being useful in day-to-day situations because they are not subject to price volatility. This makes them safer than cryptocurrencies and easier to use for everyday transactions. And, with more people using stablecoins to lead normal lives, their legal backing will help them gain power in currency markets.
And this doesn’t only apply to the financial sector; stablecoins could also be used for sites like Craigslist where people can trade items using cryptocurrencies without having to worry about price fluctuations.
With all of these benefits and legal support, it looks like stablecoins will soon take over the world and become a trusted method of payment for merchants and consumers alike.
