The Rise of Stablecoins: A Safer Alternative to Traditional Cryptos?

What if you can take advantage of the growth of the cryptocurrency-type product without facing its famous fluctuation and exist in a stable and transparent financial space based on blockchain technology? Introducing stablecoins, the latest phenomenon in the virtual currency family that is designed to do that. Amid an enormous amount of new digital assets, stablecoins are already becoming a kind of ‘Safeway’ because they offer the opportunity to revolutionize the world of money. However, do they help provide a better chance than more recognized digital currencies?

Recognizing Stablecoins: The Fundamentals

Excising the fundamental knowledge of volatility in traditional cryptocurrencies is vital to embrace stablecoins. However, cryptocurrencies such as Ethereum and Bitcoin are still fresh and new even though they are volatile. For instance, shortly, the price of Bitcoin can change by thousands of dollars through market mood shifts, regulatory changes, or mere speculations. These digital currencies are highly unstable and fluctuate in value: the profit could just be high as well as loss.

As it can be inferred from their name, stablecoins were designed to offer a solution to this problem. These are a kind of digital currency that is designed to be deflationary, i.e., to maintain its value. They often work side by side with traditional tangible assets like fiat currencies (for instance US Dollars), commodities (for instance gold), or even other Cryptocurrencies. For this reason, they are more suitable for everyday usage and reliable business and are less sensitive to the volatility characteristic of traditional cryptocurrencies.

Stablecoins come in three main categories:

Fiat-collateralized are those stablecoins where fiat money, particularly the US dollar, acts as a kind of collateral. For every actively used stablecoin, there is a certain amount of fiat money held in reserve. As mentioned before stablecoins such as Tether, USD Coin, and Binance USD to name a few.

 Crypto-collateralized by using other cryptographically backed assets, stablecoins are called ‘crypto-collateralized’. By using stablecoins to purchase cryptocurrencies, these stablecoins are backed up at higher rates to mitigate the effects of volatility change because the cryptocurrencies themselves have volatility. The practice of having solid ground and trust in the crypto-backed stablecoins is an excellent example seen in the DAI of Maker DAO.

Algorithmic stablecoins are those that operate based on some algorithms in the supply and implement price controls instead of having any physical support. The system strives to keep the value intact by using the fluctuations in the quantity of circulating coins. For instance, Ample forth (AMPL) and TerraUSD (UST).

Each type of stablecoin employs different ways to maintain its peg and stability, but they all share a fundamental goal: to introduce a new digital currency that will be more reliable for use in actual trading.

Advantages of Digital Currencies:

Stablecoins combine the finest features of both worlds: The delineation of efficiency, the successful transparency, and the borderlessness of the blockchain technology with the less volatility that has been characteristic of traditional money and assets. Let us examine the main benefits that distinguish stablecoins from more established cryptocurrencies:

1. Consistency in Value

That stable value is undoubtedly stablecoins’ biggest selling point. Unlike most trending cryptocurrencies, stablecoins provide certain stability by keeping a stable value even with fluctuations in time through the pegged stable assets for example the US dollars. They are hence suitable for diverse expense activities including procurement of goods and services or payment of salaries.

2. A cost- and efficiency-effective transactions

Traditional international payments are slow, require third parties, and are costly. However, stablecoins enable instant peer-to-peer blockchain transactions and hence do not have these hindrances. Stablecoins are cheaper and faster than conventional banks for fund transfers, within or across borders.

3. Worldwide Availability

Access to stablecoins is possible with a smartphone and internet access for every person. The inclusiveness of these people without funds to deal with conventional institutions with a concentration in underbanked regions benefits from this. Stablecoins offer the holder an opportunity to own and trade in relatively more stable currency for people in countries experiencing high inflation and volatile native currency.

4. Improved Security and Greater Visibility

Stablecoins are more transparent than cryptocurrencies due to their operation on the decentralized blockchain. The added benefit of blockchain lies in the fact that since each exchange has been recorded and not anything recorded on the block can be erased, fraud cannot occur. From another perspective, users are likely to trust fiat-backed stablecoins because most of the latter undergo auditing processes to ensure that the corresponding fiat reserves tally with the circulated supply.

5. Relating Cryptocurrency and Conventional Finance

Stablecoins are used to indirectly connect the cryptocurrency industry with the traditional financial system. They offer window dressing for traders to quickly gain or lose volatile cryptocurrencies and mostly offer a ‘safe heaven’ during a tumultuous market. Besides, users can try out the blockchain platforms without getting a raw deal due to volatility because of this correlation.

Are Stablecoins as Trustworthy as It Is Being Claimed?

Stablecoins, similar to every other form of cryptocurrencies and blockchain assets, have their perks and drawbacks. Although they might seem more secure than conventional cryptocurrencies, consumers should be informed of the following possible drawbacks and difficulties:

1. Examining regulations

Since stablecoins have come onto the scene, governments and regulatory bodies across the globe have begun to take notice. Regulators worldwide have similar fears that the adoption of stablecoins is capable of disrupting the current financial order. Just as the result of this examination could be that stablecoin availability and adoption will be threatened by tighter or even restrictive rules and regulations of its issuance and usage.

For example, the US government and its agencies proposed that the stablecoin issuers should be tamed as banks; this has implied greater scrutiny of the market that could deter innovation.

2. Hazards of Centralization

Many fiat-backed stablecoins are incorporated and operated by central authorities while most of the cryptocurrencies are known for their decentralized characteristics. There is counterparty risk in it; users have to believe that the issuer has adequate capital to back the outstanding stablecoins. A user investing in stablecoins may lose a lot of money if the issuer decides to act dishonestly or simply underfunds a coin.

3. Algorithmic Stablecoin and Its Failures

In the past, there have been algorithmic stablecoins, which according to the algorithms, they use in their functioning, have faced some difficulties. This is a very dangerous proposition to the stablecoin’s value because it could plummet if the value of the asset can no longer maintain this ratio. For example, the recent events in the Terra ecosystem were a notorious algorithmic stablecoin blow-up, with people losing insane amounts of money. Even their most measure of credibility as a long-term solution for holder-supplied price stability has been revoked in the wake of this incident.

4. Transparency Reserved

There are also fully transparent and traceable fiat-backed stablecoins and there are less transparent fiat-backed stablecoins concerning their reserve disclosures. For instance, there have been endless questions about the capacity of Tether (USDT) to back all the tokens it has launched due to reserve gaps. There will be uncertainty in futures markets, and consumer confidence can be shaken due to situations that are not transparent.

The Prospects of the Stablecoin Usage

There is pain, but stablecoins are here to stay. Mainstream banking is getting gradually attracted towards stablecoins. Governments are exploring the potential use of central bank-implemented digital currency that works in like fashion to stablecoins while companies such as PayPal have already released their stablecoins. Thus, stablecoins should remain relevant in world financial relations as the market of crypto assets is still growing.

Introducing stablecoins provides opportunities for significant development of the decentralized economy and the formation of adequate, stable lending and borrowing rates for users of the DeFi service. Moreover, there could be new types of stablecoins that are more decentralized, secure, and transparent, appearing in the future due to the further advancement of blockchain technology, which will eliminate some existing problems.

Conclusion:

Stablecoins represent a solid replacement for more ‘traditional’ cryptocurrencies because they have embedded price stability along with the benefits of blockchain. Stablecoins therefore represent a perfect product for anyone who would like to have a reliable cryptocurrency for common purchases, remittance services, or as coins for hedging. Nevertheless, this is also the case with financial innovations’ background, and in almost all cases, one must ‘awake’ and monitor risks, changes, or issues in the regulatory environment.

However, stablecoins are quite different: As opposed to all the other forms of financial tools of the twenty-first century, these cryptocurrencies are far more reliable and stable. Stablecoins are without doubt major benchmarks for setting the course of electronic currency; however, it remains unclear whether they can compete with or complement more popular cryptocurrencies.