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Cryptocurrencies are designed to work as a medium of exchange where any central authority is not involved. Despite numerous benefits of cryptocurrencies, there are few severe negatives of cryptos, including their high volatility.
compared to regular currencies, digital currencies are highly volatile in price. This is the primary reason why cryptos are more of an investment option and not a currency.
Keeping in view the volatility of cryptos, stablecoins were launched as a new class of cryptocurrency in an attempt to maintain price stability. The most crucial thing regarding stablecoins is that they are backed by an asset or fiat currency. For instance, they can be backed by the U.S. dollar or gold. In short, stablecoins are known to combine the privacy and instant processing of cryptos with the stable values of fiat.
We are pretty aware that the fiat currencies are almost stable, i.e., they are not volatile compared to cryptocurrencies. The reason behind their stability is that government authorities control them. Their value doesn’t change much because they are pegged to an asset. In contrast, it is not the case with cryptocurrencies. Being decentralized, cryptocurrencies are highly volatile.
There are few instances where the value of fiat may change quickly, but their prices are still controlled and managed by central authorities to maintain stability. So, it can be concluded that fiat currencies are highly stable when compared to digital currencies.
Stablecoins bridge the gap between cryptocurrencies and fiat currencies because fiat currencies back them. There can three kinds of stablecoins, depending upon their mechanism of working, i.e., fiat-collateralized stablecoins, crypto-collateralized stablecoins and algorithmic stablecoins.
Tether was the first stablecoin launched in 2014 by Tether Limited. The rise of stablecoins started soon after the crypto exchanges started listing Tether for trading in 2015. When launched, the concept of Tether (USDT) was pretty straightforward, i.e., it was introduced to maintain a stable price of crypto.
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Although USDT started slowly, soon after the rise in the price of BTC, Tether’s supply also surpassed 1 Million in 2016.
Image representing the Market Capitalization of Tether
Soon after the successful launch of Tether, many other stablecoins were launched in 2018, including USD Coin (USDC), Gemini Dollar (GUSD), Paxos Standard Token (PAX), and Dai token (DAI).
Stablecoins have gained more growth because these are a preferred mode to send money through DeFi smart contracts. Additionally, the regulatory developments around stablecoins are also promising.
Due to their stability in price, stablecoins have gained a lot of popularity. These are already being used as a currency to trade, and their use of DeFi platforms is quite common.
It is indeed a requirement of the economy to have a payment system that can make payments without delay and is free from intermediaries. The stablecoins can potentially fulfil all the needs of cryptocurrencies along with combining the benefits of price stability.
In future, there might be state-issued stablecoins as well because the government is also more inclined towards stablecoins. Also, being backed by fiat, stablecoins have a better chance to get adopted as a mode of payment by the public. Hence, stablecoins can potentially revolutionalize the world for good.
The introduction of stablecoins is the most crucial step in bringing crypto into the mainstream. In the past few years, many stablecoins have created and launched in the market. The point that is to be kept in mind is that not all stablecoins are equally created. Potential investors should do proper risk management before investing in any of the stablecoins.