What are Stablecoins? A guide to Fiat-Pegged Cryptocurrencies
Stablecoins arose as an answer to the volatility of cryptocurrencies. Their values are pegged to fiat currencies so that the user has an assurance of controlled volatility.
Stablecoins are digital currencies, and their values are tied to an existing currency like the US Dollars, UK Pounds or the European Union Euros. Theoretically, they could be tied to any asset.
The certainty of the value of fiat currencies gives the stablecoin user an assurance of value retention. This way, the adverse volatility of the marketplace will not rear its head and lead to a loss of value.
Every stablecoin boasts of the following qualities:
· Assurance of price stability
The user is able to project and hold a stablecoin based on the value of the underlying fiat currency.
· Stability in value
Although fiat currencies can depreciate relative to other currencies, their stability is largely assured.
A degree of privacy is also assured with stablecoin holdings. It is not reflected or easily accessible except the wallet holder.
Cryptocurrencies enjoy varying levels of decentralization. This is also true of stablecoins, and anyone can buy and sell them with ease.
Building a Stablecoin
There is no doubt that cryptocurrencies are changing the world and have become a part of daily life, and stablecoins have joined the narrative. Whether you are interested in knowing how to create your own stablecoin or how they work, this section will interest you.
Stablecoins have the following structure:
-Issued on a collateral receipt (Reserve-backed)
Some stablecoins have a tight structure that means issuance can only be made on presentation of fiat currency for its circulation. What this essentially means is that for a given unit of the stablecoin to be pumped or released into circulation, the exact fiat-currency collateral must be provided.
The commonest example of this type of stablecoin is Tether, whose promoters claim is backed 1 for 1 by the USD. USDC is another common example here.
This version of stablecoin is propelled by scientifically responding to the dictates of demand and supply. By monitoring the market pulse using targeted software, the promoters of the stablecoin are able to match the demand by a corresponding supply.
While this looks rather complicated, it is practicable and requires the existence of the right infrastructure to make this possible. Carbon and Terra are two common examples.
The Common Uses
In the marketplace of cryptocurrencies, the biggest players are the exchanges. They also constitute the biggest class of stablecoin users. The best cryptocurrency exchanges have to hedge against price volatility by holding some of their reserves in this fiat-pegged asset.
Another reason for its usage by exchanges is to boost its liquidity base. Since it is not all crypto exchanges that have access to banking services, stablecoins become a vent. The leading stablecoins command respect in many countries and since their fiat-based value is believable, they also serve a purpose here.
Exchanges can readily swap the stablecoins for any crypto of their choice in order to meet users’ demand. In the same vein., they also are near-cash assets that give immediate liquidity when needed.
For exchanges that support fiat transactions, with stablecoins, this line of demand can be met. Users also are able to leverage on the power of stablecoins to hedge against losses in a bear market. When the bulls are raging, these stablecoins can easily be used to buy any crypto of interest.
Other possible uses of stablecoins now under exploration include payment of dividends on smart contracts. Insurance and other recurring payments of defined value are also a possible target.
Stablecoins became the attraction of new crypto product offerings in the course of 2018. As of year-end 2018, at least 57 stablecoins were available as existent ready-to-launch products. Since the year experienced more bearish sentiments, it was only logical that investors saw stable coins as a desirable opening.
In some quarters, stablecoins have risen to the occasion for usage in overseas remittance. Since their values are at par with fiat, many people are comfortable with their use. So, in a sense, high oversea remittance fees are avoided by sending stablecoins to a recipient.
For a segment of the investing public, the crash in the market price of Bitcoin was a big eye-opener. Stablecoins became the shield against loss of value. By shifting crypto holdings to USDC or DAI, the investor avoids the peril of value loss significantly.
Since many stablecoins are traded across the globe, transferring them to certain jurisdictions come up cheaper than money transfer. Hodlers are also able to overcome foreign exchange swapping difficulties when they travel across the globe.
Safety is also boosted as no physical component is necessary to store stablecoins. They can remain in digital wallets and can be sent or swapped at the point of use.
A noticeable hurdle that can be crossed with stablecoins is conflicting regulations across several countries that businesses are exposed to. While money transfer limits exist in many countries, what they really differ is from place to place. To beat these uncertainties, stablecoins became the crypto of note. Also, efficiency in major crypto exchange platforms can be improved.
Why the Proliferation?
Proliferation occurs in most markets when demand surges. This is the truth with stablecoins. While USDC emerged as a dollar-pegged option, Tether and DAI also were dollar-denominated. As the global awareness of crypto heightened, some nationals saw the need to have a stablecoin to meet their needs.
Stablecoins pegged to the dollar, euro, Swiss francs, pounds, and yen, are either in the works or already in the marketplace. Since the bulk of the global economy is driven by these national currencies, it became fashionable to have one or more stablecoins so themed.
On the national and governmental front, it has been speculated that the Chinese government was working behind the scenes on national crypto. This would certainly be a stablecoin tied to the Chinese currency. Same whispers have been heard in Russia, Japan, and other climes. While the Venezuelan experience of Petro was not pleasant, other reasons toppled its viability. And this was largely political.
One precise observation about stablecoins is the scalability issues facing blockchains. At present, no stablecoin boasts of a platform that is worthy of note. This no doubt limits the possibilities of a stablecoin. Right now, they exist as digital currencies, but they can be a lot more useful.
While continental blocs and countries are yet to proactively launch stablecoins that commands global attention, this can be done. However, since monetary policies dog the present fiat-currency regime, not many governments might be willing to let go that anytime soon.
The emergence of stablecoins as a subset of cryptocurrencies has been a welcome development. Although it is honest to note that the pace of adoption is gradual to date, they have earned a spot on the charts of global financial markets.
Lots of possibilities exist in the next frontier as organizations, governments, and power blocs explore how best to use stablecoins.