Understanding the Emergence and Benefits of Stablecoins
Blockchain technology has rapidly transformed the way businesses operate and over the years, it has disrupted major industrial sectors. It provides decentralized, secure and faster transactions of cryptocurrencies- a digitized form of physical currencies. With more than 200 crypto assets currently dominating the financial market, these digital coins were birthed to replace the complications associated with fiat currencies.
While conceptually fit to be the ideal form of money, cryptocurrencies are considered volatile. Let’s understand why.
The cryptocurrency pricing is governed by the laws of supply and demand — if people wish to buy, prices increase; if people wish to sell, the prices decrease. Apart from this, there are two major factors that contribute to market fluctuations.
- The first factor includes its small market size as compared to the established forms of currencies. With an overall capitalization value of $267 billion, the crypto market size is still insignificant to the US stock market capacity of $28 trillion or to that of the gold market with $7.9 trillion bandwidth. This implies that even a small movement of crypto currencies can considerably have a very large impact on its price.
Let’s say if an investor decides to sell $100 million in gold, it would barely create any difference in the gold pricing. However, if a similar amount is used to sell Bitcoin, it would destabilize the entire crypto market and lead to a rate crash for all forms of digital currency.
- The second factor involves the general perception of cryptocurrencies in people’s mind. Supposedly, if people start believing that the price of a particular crypto currency will no longer rise, they will begin selling them off. This reduces the cryptocurrency’s value and further stimulates other investors to follow the similar trend. The cycle continues and causes the crypto market to fluctuate very often based on the quick buying and selling trends. Also, there are a few big investors with large portions of stake in the cryptocurrency market, enabling them to hold disproportionate amounts of power over the cryptocurrency pricing.
However, understanding that the problem is not about crypto currencies in itself and considering the other benefits that these crypto assets hold, the digital industry found an alternative way to combat the situation.
This is where the concept of Stablecoins comes into play.
An overview of Stablecoins
The introduction of stablecoins lies in its working. They are, at core, market-headed crypto currencies that are powered by real-world assets such as fiat currencies like USD and precious metals like gold. Reckoned as ‘stable’ assets, their prices are pegged at a particular level with one-to-one ratio to universally recognized assets held as a collateral in reserves. They are objectified to reduce price fluctuations, instability and market volatility. A lot of global industries have already started implementing stablecoins in their business framework, posing infinite potential in the near future. Integrated with the neoteric blockchain technology, they are effectively helping to verify, control and secure digital transactions.
Since stablecoins are attached with global assets, they maintain a steady price in the virtual marketplace. As a result, they have become a prime liquidity source in the volatile crypto world.
Major usage of stablecoins can be witnessed with traders handling them to buy and sell cryptocurrencies on crypto exchange platforms that don’t accept fiat currencies. This further provides a safe place for saving funds whenever virtual markets go through a hard turmoil.
Having understood the basic workflow, there are three types of Stablecoins available with us today.
- Fiat-collateralized stablecoins
- Crypto-collateralized stablecoins
- Non-collateralized stablecoins
Each segment offers its own version of security and transparency, from being crash-proof to decentralized, stablecoins have bridged the gap between digital and fiat currencies.
While we are patiently waiting for various businesses to come up with their own kind of ‘perfect’ stablecoin, what needs to be focussed on are their importance and benefits!
Importance of Stablecoins
- Everyone with access to the internet can buy or get stablecoins. It has opened new doors for administering global financial systems.
- Owing to the connection between fiat and digital realm, the evolution of new blockchain development companies are on the rise.
- The convergence of stablecoins and tokenized securities has enabled them to make practical dividends and investments.
- Since stablecoins payments are not subjected to cryptocurrencies’ volatility, high programmability will take place in the virtual world.
Benefits of Stablecoins
To curb the general real-world problems of investment and purchase, stablecoins have become a staple means of trading and selling. It provides crypto traders with an assurance to know what they are paying for and what they are getting back in return. The benefits include:
- Governed by smart contracts
- Leak Proof security
- High liquidity
- Price rates stability
- Investors’ privacy
As more and more working sectors are diving into the deep virtual pool, stablecoins are expected to become the key that unlocks the digital market.
If you are already using stablecoins, try NitroEx Crypto Exchange to access wide liquidity pools and trade with cryptocurrencies to get maximum profits on your investments.
Read more: Bitcoin Halving: Optimizing Mining Efficiency With NitroEX