What are Stablecoins: An Overview
By AsianMarketCap Official on The Capital
Cryptocurrencies are known for paving the way for decentralized, peer-to-peer methods of payment and blockchain-based currencies are promising to take electronic money to the next level. There are several obstacles that hinder their widespread adoption and might block the support that national governments have regarding cryptocurrencies.
One of the biggest issues that cryptocurrency face is the extreme volatility of market capitalization and price swings. This has led to the development of the proverbial pot of digital gold: Stablecoins.
Stablecoins are digital assets designed to mimic the value of fiat currencies like the US Dollar, other cryptocurrencies, precious metals, or a combination of these three. As the name suggests, they are designed to have a consistent price or value over time. Stablecoins are a new type of cryptocurrency that often have their value pegged to another asset. They allow users to cheaply and rapidly transfer value around the globe while maintaining price stability. They are normally collateralized, meaning that the total number of stablecoins in circulation is backed by assets held in reserve.
Cryptocurrencies like Bitcoin and Ethereum are known for their volatility when priced against fiat. This is expected since cryptocurrency markets are still relatively small compared to foreign exchange and traditional stock markets. Also, the technology behind them called blockchain technology is still very new. As mediums of exchange, cryptocurrencies are excellent from a technological point of view. However, because of their volatility, they are not ideal for payment. To date, cryptocurrencies have predominantly been bought and traded as speculative investments, rather than as a means to purchase products and services.
Stablecoins don’t have these issues. These assets see negligible price movement and closely track the value of the underlying asset or fiat currency that they emulate. As such, they serve as reliable safe haven assets amid volatile markets.
Without stablecoins, taking out a loan while using crypto as collateral can be risky, as the assets used to secure your borrowing can be rendered worthless in a short space of time. They offer the type of predictability that many countries struggle to achieve with their national currencies — hence why Venezuela, battling hyperinflation and political instability, decided to launch its own cryptocurrency. Consumers can quickly and easily convert from unpegged cryptocurrencies to stablecoins when they are worried about where the markets are heading next, eliminating the need to return to a fiat currency.
The question of mainstream adoption still echoes across the crypto landscape. While stablecoins have not hit the mainstream just yet, they offer a sensible but suitably dynamic solution to the problems that crypto has faced as a means of exchange.
With new stablecoins launching all the time, and trading volumes on the rise, this is a segment of the crypto industry that could grow further in the coming years. Undoubtedly, new use cases will emerge along the way — potentially offering a temptation to consumers who have been reluctant to use virtual currencies so far.
Conclusion
We will write another article to discuss more information about stablecoins soon.
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