What are stablecoins and are they the future of cryptocurrency?

What are stablecoins and are they the future of cryptocurrency?

As the name suggests, stablecoins are there to solve one very important issue – a stable value – which volatile crypto counterparts lack.

The stability of stablecoins comes with the help of them being supported with a stable asset, usually fiat – a government-issued currency that we’re already using, such as Euros and US dollars. Why this will remain stable is important to understand because the entity behind each stablecoin puts up a reserve of assets that are supporting each stable currency – at least, that is what they are supposed to do. This helps to have collateral if anything goes wrong and renders the digital cash and a real-world asset interlinked. Because of the stability it offers, the market cap of stablecoins is about US $75.3 billion making it up to 3.77% of the global cryptocurrency market cap.

Fiat is not the only asset that supports a stablecoin, although it certainly is behind the most popular ones. Some stablecoins are reinforced with precious metals such as gold and silver. Algorithmic stablecoins like TerraUSD rely on cryptocurrencies like LUNA; they have proven disastrously unstable.

Why stablecoins are a possible gateway for digital currency

In order for stablecoins to become more successful in the future and possibly fill the gap of digital currencies, they need to align with these four conditions:

What Are Cryptocurrency Futures?
What Are Cryptocurrency Futures?
  • They need to have the proper technology.
  • There needs to be an increase in consumer demand.
  • Big corporations have to include them within their spreadsheets.
  • A regulatory environment must support the asset.

Currently, most of these conditions are being met. As the technology is becoming more mainstream, more investors are putting in their money. Furthermore, the reason why stablecoins can become the next big thing is their low volatility and close relationship to new crypto trends.

Low volatility

Volatility is the most important thing to consider. Stablecoins solve major problems with cryptocurrency in e-commerce. As the most common stablecoin, USD Tether is tied with the US dollar. Therefore, its price remains less volatile than most cryptocurrencies. While this is a piece of good news, many experts do argue it is as good as the asset supporting it. If the asset supporting it is strong, then, of course, the stablecoin remains strong and vice versa.

No Bitcoin-effect

Unlike with most cryptocurrencies – in which one main coin (Bitcoin) largely dictates the price movement of other currencies – this does not happen with stablecoins as each of them is supported by their collateral or asset.

Close relations with new crypto trends

Stablecoins are often associated with the new game-changers in blockchain technology such as Defi (decentralized finance) and NFTs (non-fungible tokens). Both of these technologies are solid and solve important issues.

One final note

While it is early to predict with complete certainty the future of stablecoins and their activity in day-to-day transactions, one thing that can be said with confidence is that stablecoins do offer a promising solution to overcome the existing challenges with cryptocurrency. The usage of digital currencies keeps on maturing along with the technology behind it. But for this to be a solid possibility, it will be important for financial institutions to give it a green light, which doesn’t sound like a far-flung idea anymore.

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