Demystifying Stablecoins

It’s truly remarkable to witness the transformation blockchain has brought into our financial system. It open our eyes to the era of sophisticated technology.

However, Bitcoin has attained amazing feats from being a coin that has been underrated like an old tavern to a digital currency being adopted globally.

It is crucial to understand its volatility which at times might affect business transactions and growth.

For instance, Mr Sydney who is into large-scale retail of gadgets and electronics built his business payment system around Bitcoin because of its incredible features such as transparency and fast transactions.

However, Bitcoin suddenly dropped down in value with a huge margin which resulted in a huge loss of thousands of dollars which affected his business.

If you have also suffered from such tragedy and you are looking for another currency to switch to. I am happy to inform you that there’s a digital currency called Stablecoins whose value is relatively pegged to a fixed currency like USD.

In this article, I will introduce you to the amazing world of stablecoins and its benefits. It is going to be an interesting read.

What is Stablecoins?

Stablecoins is a type of cryptocurrency whose value is dependent on the value of another stable currency like USD or gold.

It’s been shown that combining the stability of traditional assets with the flexibility of digital assets works incredibly well.

Stablecoins, such as USD Coin (USDC), have seen a large inflow of value as they have grown to be among the most well-liked methods for storing and exchanging value inside the cryptocurrency world.

Note that:

• Stablecoins is very useful as a medium of exchange compared to fluctuating cryptocurrencies such as Bitcoin.
• Stablecoins can also be put as a parasitic coin that pegged its value to only stable host such as USD or Gold.
• It gives business owners multiple assurances of storing their assets without losing their value significantly.
• It is always scrutinized by regulators because they believe that it has the potential to affect the broader financial system

PayPal, a leading payment company, stated on August 7, 2023, that it is issuing its own USD (PYUSD), a stablecoins pegged by the US dollar.

Since it’s the first time a well-known financial company is releasing a regulated stablecoins, many people who are new to cryptocurrency are wondering what stablecoins is and why they’re utilized.

Why is Stablecoins so Important?

Although volatility can be very beneficial to traders, it also exposes buyers and sellers to dangerous speculation on ordinary transactions such as purchases.

Long-term cryptocurrency investors do not want to be known for spending 10,000 Bitcoins on a couple of pizzas. In the meantime, the majority of retailers do not wish to incur losses if a cryptocurrency’s value declines after they are paid with it.

At the moment, USDC operates on the Ethereum blockchain, just like numerous other stablecoins. When compared to non-pegged cryptocurrencies, stablecoins are less volatile.

For instance, the USDC stablecoins is backed by dollar-denominated assets in segregated accounts with US-regulated financial institutions that have a minimum fair value equivalent to the USDC in circulation. An independent accounting company attests to these accounts.

Types of Popular Stablecoins

Tether

One of the first stablecoins, Tether (USDT), was introduced in 2014 and remains the most well-used to this day. In terms of total market capitalization, it is among the most valuable cryptocurrencies.

The main purpose of USDT is to facilitate fast money transfers between exchanges so that traders can profit from arbitrage opportunities where there is a difference in the price of cryptocurrencies between two exchanges.

However, it has other uses. For instance, To get around China’s severe capital limitations, Chinese importers based in Russia have also used USDT to transfer millions of dollars worth of value across the border.

If you happen to be an enthusiast of USDT, you can learn more about how it works here

Dai

Dai is a stablecoins on the Ethereum blockchain that runs on the MakerDAO protocol. It was established in 2015 and is backed by ether, the Ethereum token and it is pegged to the value of the US dollar.

In contrast to existing stablecoins, MakerDAO aims to create a decentralized Dai, where no single entity is trusted to maintain system control. Instead, Ethereum smart contracts which represent immutable rules are responsible for this.

USD Coin

Through the Center Consortium, USD Coin was jointly introduced in 2018 by Coinbase and Circle (both startups are cryptocurrency firms).

Similar to Tether before it transitions to a variety of collateral assets, the USD Coin is also pegged on the US dollar. Since USDC is an open-source protocol, anybody or any business can utilize it to create their products.

If you are curious to know about how the USD coin works, click here

Uses of Stablecoins

• It is used to earn rewards through stablecoins investment
• Trading and saving of assets
• it can be used to transfer money internationally with a low transaction fee
• It can be used to minimize volatility
• 24/7 accessibility through the internet

Cons Associated With Stablecoin

1. Market Risks

Stablecoins value corresponds with the value of the assets that support them. The stablecoin’s value may drop if the value of these assets declines. It’s critical to keep in mind that stablecoins involve risks, just like any other type of investment.

Before making any stablecoins investments, it’s critical to be aware of these potential risks and to only invest what you can afford to lose. Before making any investing decisions, it’s a good idea to conduct your research and consult a financial expert.

2. Transparency

Public criticism has been levelled at several stablecoins for lacking reserve transparency.

For instance, there has been significant public outcry about Tether’s reserve levels, which has resulted in fines and restrictions from the US government. Since then, a report on the company’s current reserve holdings has been made public.

3. Counterparty

A common feature of stablecoins is their backing by other assets, such as cryptocurrencies or fiat money. You might forfeit your investment if the business or organization in possession of these assets fails.

This type of risk is referred to as counterparty, and it is important to know who is supporting the stablecoins and what kind of assets they own.

4. Liquidity Risk

It may be challenging to locate buyers if multiple individuals want to sell their stablecoins at once, and the market value of the stablecoins may decrease. It can be particularly dangerous for smaller or less well-known stablecoins.

5. Technical Glitch

Stablecoins rely on sophisticated technologies, such as blockchain. You can lose your investment if there are technical issues with the technology or a breach of security.

Conclusion

Stablecoins have been a popular addition to portfolios among traders as a hedge against declining fiat or cryptocurrency markets. In addition, companies all around the world use these digital assets to make payments without the volatility risk and with all the advantages of digital currencies.

Users may now access and buy Tether (USDT) and USD Coin (USDC) through the Tap app. Users who wish to buy or trade cryptocurrencies using fiat money through their phones can do so with ease thanks to the app’s elegant design.

However, given that stablecoins are still relatively new and unproven, investors should conduct an extensive study and fully comprehend the advantages and disadvantages of investing before making any decisions.