Explaining Stablecoins and How do they Work? What’s the purpose of Stablecoins?

Image Source: ethereum.org

Every day, it seems like there’s a new frothy cryptocurrency in the headlines that are making people rich. Today, we’ll discuss one of crypto’s most essential but under-appreciated sub-sectors: Stablecoins.

The volatility of the cryptocurrency market is well-known. This means that coin prices can quickly rise and fall, making it difficult for investors to decide whether or not to invest in a particular coin. Stablecoin, on the other hand, provides a solution.

Stablecoins are digital currencies that are linked to a “stable” reserve asset such as the US dollar or gold. Stablecoins are intended to be less volatile than unpegged cryptocurrencies such as Bitcoin.

Stablecoins aren’t likely to make anyone rich, but they are unquestionably among the most essential cryptocurrency projects. Governments, central banks, and major corporations such as Facebook, VISA, and JP Morgan are all considering adopting or developing their own.

So, what’s the big deal about this? What is the significance of these coins? How do they function? What plans do governments, banks, and IT firms have for them? Let’s get started.

Cryptocurrencies like Bitcoin and Ethereum are probably familiar to you. If not, you can learn more about them by reading our articles on the website “theproficiencypost.com“. You will find comprehensive information on all new and ancient cryptocurrencies here

While there are many positive aspects to Bitcoin, it is not ideal money. Although it was intended to be used as a currency, the fees were far too high, and transactions were considered too slow for everyday use. Waiting 10 minutes or paying $10 in fees for a cup of coffee is impractical.

Although the lightning network solved these issues, there is still one major flaw that makes Bitcoin a poor day-to-day currency: its volatility. Consider this: a single tweet from Elon Musk may send Bitcoin to the moon or to the dumpster! This has a significant impact on its ability to function as a dependable unit of account, making it a poor choice for a regular currency.

However, there are other advantages to cryptocurrencies that Bitcoin introduced to the world, like fast, low-cost settlements without the need for middlemen, decentralization, asset control, and a worldwide monetary system that is built into the internet, to name a few.

Consider what it would be like if we could have all of those things without the risk or volatility. Stablecoins are a type of cryptocurrency. The most obvious solution to the problem of volatility is Stablecoins. 

Stablecoin offers many of the same advantages as Bitcoin, but with one major difference: its value is tied to another currency, such as the US dollar or the British pound.

The benefits of bitcoin are combined with the pricing stability of a fiat currency such as the US dollar. Stablecoins are a far more practical currency because the goods and services we use are still priced in dollars.

Tether and USDC are centralized Stablecoins, while DAI and Terra UST are decentralized and algorithmic. Let’s take a look at Tether, a popular yet contentious Stablecoin. Tether, the world’s first stablecoin, was first released in 2014 as a coin called “RealCoin.”

Every Tether dollar or USDT is theoretically backed by an equal number of assets such as dollars, euros, or pounds. This should ensure that users can change their tether to dollars whenever they want, though there is some debate about whether tether maintains the correct amount of backing.

This is often regarded as one of the most significant threats in the cryptocurrency industry, but that’s a topic for another article. 

While some Stablecoins, such as Tether, store a similar amount of non-crypto assets to maintain their peg value, others, such as Terra UST, employ an algorithmic technique to keep their peg value, relying on arbitrageurs to bring the stablecoin value back to its peg if it ever deviates too much.

Facebook, now known as Meta, is also attempting to enter the space… They had planned to introduce its own Stablecoin called DIEM, however, that idea has been put on hold for the time being. Meta’s goal is to unite the world and eliminate borders. One of the goals of this vision is to make it as simple for people to send money as it is to send images or messages!

Stablecoins now have only one critical task: to keep their value pegged. But saying it is easier than doing it. Because many stablecoin projects are young and haven’t had enough time to be battle-tested, there are a lot of potential issues and risks. 

Tether, for example, has faced scrutiny in the past due to its inability to demonstrate that it had the assets to back up all of the Tether in circulation.

This may cause people to lose confidence in the stablecoin, lowering its value. In fact, at one point in 2018, the price dropped by 15%, bringing it down to 85 cents! Is this the kind of stability you’d expect from a stablecoin?

Price dropped
Image Source:  YouTube

Despite the debate surrounding Stablecoins, financial institutions have set in motion a massive and unstoppable wave of acceptance. 

When you can settle massive transactions for a fraction of the cost of traditional ways, earn significantly higher interest, and have access to a completely new financial market, you can bet the big banks and payment processors aren’t sleeping on this wave of innovation.

Banks and payment processors are minor players in comparison to some of the entities who want to use Stablecoins: central banks. China, for example, just released a digital version of its own money, giving it a new level of economic control – but that’s a topic for another post.

Stablecoins aren’t the most well-known cryptocurrencies, but they are among the most important, attracting large amounts of capital and the innovation that comes with it. 

According to CoinMarketCap, a cryptocurrency statistics and analytics firm, these are the top ten trading Stablecoins by market capitalization.

Top ten Stablecoins
Image Source: CoinMarket Cap

If you liked this article, please leave your suggestions in the comment box. And if you want to understand more about cryptocurrencies and how to make money with them, keep reading our articles.

Disclaimer: The crypto market is extremely volatile, so proceed with caution. The information in this post is solely for educational purposes. Only invest once you’ve done your research and come to a final conclusion.

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