Understanding Stablecoins – The Distinct Cryptocurrency Instrument

Beginner’s Guide / 17.12.2018

Data reveals that the overall market cap of stable coins stands at over $35 B as of January 21, 2021. On top of that, the trading volumes are gradually rising as the crypto instrument closes in the $90 billion marks. 

Investing in the digital asset world has become a difficult task for goal-oriented minds. However, the onset of stablecoins has proven to be a useful tool for trading in the market today.

Stablecoins can be described as cryptocurrencies tied to other valuable assets or commodities. Therefore, the crypto assets are barely affected by high volatility levels, unlike regular cryptocurrencies like Bitcoin, which fluctuate significantly. 

In essence, stablecoins introduce the idea of linking digital assets and traditional assets’ stability into play.

Forms of Stablecoins

Stablecoins exist in three different forms depending on the assets that back them.

Decentralized Stablecoins

Here, the stablecoins are tied to cryptocurrencies while the pegging procedure takes place on a blockchain network via smart contracts. On certain occasions, users are granted crypto collateral loans that are locked in a smart contract.

The loans are payable once the value of the stablecoin elevates. Crypto-backed stablecoins are not owned by any entity but rather a global network of users. Hence, it instills the whole idea of a decentralized ecosystem of governing stablecoins and the crypto assets tied to them. 

DAI is an excellent example of a crypto-backed stablecoin running on the MakerDAO ecosystem. The stable asset is fully decentralized because it emerges once an investor deposits for it and disappears after repaying the debt.

Centralized Stablecoins

Centralized stablecoins are mostly backed by specific fiat currencies leveraging a fixed ratio level. Asides from the well-known currencies (e.g., USD, EUROs), centralized stablecoins can be backed with other valuables such as silver, gold, oil, or even corn.

Gemini dollar boasts as the leading centralized stablecoin designed to merge the modern-day U.S dollar with an advanced digital setting. Built on the Ethereum network, the platform conducts monthly examinations of the U.S dollar deposits through a regulated accounting firm.

Algorithmic Stablecoins

Digital assets under this segment operate in the absence of another pegged asset or currency. Instead, specific algorithms govern the stability of a stablecoin, which estimates its price.

Key Benefits

Utmost Transparency

All stablecoin transactions are displayed on the public ledger to promote a transparent platform. Maintaining a transparent platform guarantees a greater trust level and accelerates new customer onboarding.

Swift Transactions

Transferring funds through a blockchain network is much faster, occurring within minutes and even seconds. Moreover, stablecoin transactions do not require any third-party interventions, which lower the waiting period significantly.

Non-Volatile Instrument

Stablecoins assure investors of a stable investment option in a market full of unstable cryptocurrencies. Therefore, investors can freely trade stablecoins without getting into contact with any fluctuation issue.

International Payments

Stablecoins are transferable to any corner of the world since they are blockchain-based assets. Users can send stablecoins to their loved ones or any other recipient without unnecessary procedures that bring about delays.

Lower Transactional Charges

The traditional system typically charges a hefty fee on any translation carried out by them. It becomes a strenuous decision for investors who wish to make funds transfers. The decentralized set-up for stablecoins allows the asset’s owners to trade at a very minimal fee. As mentioned earlier, stablecoins eradicate intermediaries who would charge you unreasonable fees to render their services. 

The Downsides

Centralization Aspect

Even with the decentralized architecture of stablecoins, the digital asset is owned by a central authority that oversees its minting and supply. Therefore, most stablecoins may operate similarly to the procedures of a regular financial institution

Algorithm Risks

There are chances that malicious individuals may tamper with the algorithmic configurations meant to stabilize a stablecoin. The third-parties could implant a bug that interferes with the mechanisms for establishing a stable price.

Leveraging the Traditional Market

The primary objective of introducing cryptocurrencies was to replace the traditional financial system. However, stablecoins may sway away from that objective, mostly because their value relies on the conditions of fiat currencies, which are susceptible to inflation.

A Possible Future for Stablecoins

According to a letter from the Office of the Comptroller of the Currency (OCC), stablecoins can be used as a payment medium through authorized banking institutions. Moreover, banks can operate as nodes on an independent node verification network to transact stablecoin remittances on the customer’s behalf.

The announcement came indirectly from the acting comptroller, Brian Brooks, who formerly served as a Chief Legal Officer at Coinbase. In a nutshell, the U.S based bureau emphasizes that banks can utilize stablecoins for any banking services.

Final Word

Investors have found cryptocurrencies to be a lucrative venture, regardless of their uncertainties. Stablecoins provide an even better option as it counters the frequent volatility issues on digital assets. 

Blockchain technology fuels the effectiveness of stablecoins by granting users the ability to transfer them across borders at a lower charge. Additionally, countries like the U.S have recently allowed stablecoin payments through banks, signifying the growing crypto adoption rates. 

Stablecoins remain the most relevant digital assets as they interact with real-world fiat currencies. Incorporating a centralized and decentralized structure will eventually make it a highly dependable investment in the long run. 

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.