Stablecoins: Everything you need to know
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While the cryptocurrency ecosystem presents opportunity for investment, most assets are characterized by high risk. Stablecoins have become a piler of the Decentralized Finance (DeFi) ecosystem within crypto networks as they present a way to mitigate some of that risk by solving for price fluctuations. In addition, they facilitate both the movement of money between traditional financial systems and blockchain networks, and allow payments between network participants.
What are stablecoins?
Built on decentralized networks, they use a variety of methods to guarantee the stability of the asset versus an array of fiat currencies. Although they behave like fiat currencies, stablecoins maintain the mobility and utility of cryptocurrency. With the added benefit of acting as a secure digital store of value safe from market volatility.
Initially, Stablecoins were used to swap between alternative cryptocurrencies (or altcoins, whose value is mostly speculative) on trading platforms that do not offer an on/off ramp for people with fiat currencies. However, as the adoption grows, platforms have emerged that offer users the ability to borrow, lend and even make payments for goods and services in the stable asset. Platforms such as TòròNet and MakerDAO.
Advantages of network stablecoins
Stablecoins are easily accessible to anyone with internet access and are functional 24/7 as the crypto markets don’t close. This is particularly important in geographies where access to foreign exchange is controlled and limited to prop-up local currencies.
Additionally, stablecoins can facilitate secure international transactions processed within seconds at lower transaction fees than what is available within the traditional financial economy. An advantage that has the potential to revolutionize the remittance industry. An industry that saw $589 billion in transaction volume in 2021 from low and middle income countries alone, according to the World Bank. Projects like Remitano (a centralized crypto exchange) and TòròNet Blockchain are built specifically to address these issues. The latter allows users to complete high speed (<2 seconds), secure transactions in a native stable coin (the TORO) with transaction fees that are capped to ensure affordability.
Stablecoins also offer a value hedge against traditional fiat currencies, in high inflation environments; people living in countries with an unstable economy can use stablecoins tied to foreign currencies too. For instance, in Venezuela (where inflation is often in the triple digits), a user can easily buy TOROs (a fiat stablecoin tied to the US. Dollar) to hedge against the high inflation of the local currency.
Associated risks
Although stablecoins offer the crypto ecosystem some much needed stability, there are still some risks to keep in mind:
Counterparty risks
Counterparty risks occur when the network defaults. In this case, the central entity might not have the collateral it claims in its reserve. It is important to conduct due diligence before depositing funds on a network.
Security
Digital wallets/ digital currencies are susceptible to hackers. Once a wallet gets hacked or stolen, funds are difficult to retrace and recover.
Conclusion
Stablecoins play a crucial role in driving crypto adoption because of the price stability they bring to the ecosystem, and the versatility of the asset. They provide people with a safe haven for assets and gains deployed in the crypto ecosystem so they can wait for prices to come down, and buy back in. Additionally they provide hedging opportunities for people living in high inflation economies, and allow for safe and immediate transfer with low transaction costs safe from volatile price fluctuations.
Stablecoins are the most efficient gap (till date) between the traditional finance world and the cryptocurrency world. To explore all this and more, check out the TòròNet Blockchain.
