Explaining what stablecoins are and why they’re so important for the cryptocurrency industry
With the seemingly endless amount of coins entering the market each year, we are beginning to see various categories of digital assets emerge. One of these classifications of coins is known as stablecoins, and although you may see it as ironic that a cryptocurrency is labeled as being “stable,” that’s actually exactly what they are known for. Stablecoins make up a unique category of coins in the market that are poised to bring stability and trust back into the cryptocurrency market. With that being said, let’s go over what stablecoins are and why they are so important for the development of the cryptocurrency industry as a whole.
This is not financial investment advice.
This article will touch upon key aspects of what stablecoins are and why they can help the growth of the crypto industry.
Blockchain: The easiest way to understand blockchain is to think of it as a fully transparent and continuously updated record of the exchange of information through a network of personal computers, a system which nobody fully owns. This makes it decentralized and extremely difficult for anyone to single-handedly hack or corrupt the system, pretty much guaranteeing full validity and trust in each exchange of information.
Volatility: The rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease.
Fiat: Currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made.
Decentralization: Essentially, if something is centralized, there’s a single point that does all of the work involved in any given action. On the flip side, if something is decentralized, there are multiple points that do the work.
Familiarize yourself with these key terms in order to better understand what stablecoins are.
What Are Stablecoins?
To put it simply, stablecoins are cryptocurrencies that are pegged or backed by some other asset. Some forms of stablecoins are tied to assets such as the dollar or a commodity like a bar of gold or a barrel of oil. Other forms of stablecoins are backed by cryptocurrencies, or even exist as self-correcting, algorithmically-controlled systems. Essentially, stablecoins hold the promise of a half-step between traditional assets and crypto assets, taking the best from both worlds while resulting in a much more accessible and efficient form of finance.
The concept of having a stablecoin of stable currency isn’t new, as governments have been considering the implementation of this idea for quite some time now. National governments have the same motivation as crypto economies to deal in stable assets, as volatility in any kind of currency scheme can lead to wild speculation and boom and bust values. Historically, there have been a few different ways of implementing currency pegs at the national scale. Some countries just start using another country’s currency in lieu of their own as legal tender. Other governments have decided to set a fixed peg, while others determine an acceptable range and let their currency float within a range in relation to the peg.
Even within the cryptocurrency world, people have been experimenting, with mixed results, with stablecoin design and setup. Tether is one of the most prominent stablecoins, which is a blockchain-based cryptocurrency whose coins in circulation are backed by an equivalent amount of traditional fiat currencies, like the dollar, the euro or the Japanese yen, which are held in a designated bank account. Tether tokens, the native tokens of the Tether network, trade under the USDT symbol.
Stablecoins are cryptocurrencies that are backed by another asset, such as fiat money or another algorithmically-controlled system. This keeps the value of that coins stable and lowers the threat of high volatility.
How Can They Impact The Crypto industry?
By definition, stablecoins are inherently different than the rest of the cryptocurrencies in the industry, as their value is determined and derived differently. With all the criticism and skepticism surrounding the industry today, many people have pointed to stablecoins as being one of the biggest proponents in legitimizing the cryptocurrency market as a viable asset class.
Stablecoins could quickly become the universally accepted, international currency of the future. They have the potential to empower everyone to take part in an evolving crypto-economy, without compromising security and freedom. If implemented at scale, they are poised to become a foundational component of the next-generation economy. One of the biggest attacks against the cryptocurrency market is that the coins are too volatile and that they have no safe backing. Stablecoins solve both of those issues while still serving as a digital asset that can perpetuate excitement for the market as a whole.
Stablecoins solve the issue of volatility and lack of inherent value by having an actual asset which determines its value. At this point, they can serve as mediums of payment and monetary value while maintaining a stable price.
Sure, the cryptocurrency market may be filled with coins that are highly volatile and may not have the backing of inherently valuable assets, but what if there were coins that could satisfy all of these points? Well, with stablecoins, all of these issues are solved and the possibility of using these coins as mediums of payments becomes real. Imagine having the ability to use a cryptocurrency that is essentially valued the same as other widely-used assets like fiat money, oil, or even gold? The digital asset economy is quickly revolutionizing the world, so keep an eye out for this category of cryptocurrencies to one day become the future of the industry.
Have you used stablecoins before? What are some of our favorite stablecoins in the market? Let us know why in the comments!