Stablecoins are new cryptocurrencies that have been developed with the intention that they can maintain a relatively stable value. They are usually backed by reserve assets. The idea is that stablecoins will offer price stability for crypto assets in a way similar to fiat currencies. Stablecoins can have their values fixed to certain fiat currencies such as the US dollar in a 1:1 ratio. They can also be pegged to physical commodities such as gold. Collateralization mechanisms are what make it possible for stablecoins to maintain their price stability.
Contents
Understanding Stablecoins in Greater Detail
One unfortunate attribute of cryptocurrencies that often worries investors is their high volatility. While Bitcoin (BTC) remains the most valuable and popular cryptocurrency, its level of volatility is rather insane. For instance, in November 2019, one BTC was worth around $5,000. By December, the price went up to a whopping $19,000, after which it then rapidly lost two-thirds of its value, plummeting back down to $6,000 in February 2020. In a matter of just a few hours, the value of BTC can swing back and forth to any value without any warning.
The instability of BTC frequently poses threats to the resources of its investors, and at the same makes cryptocurrency inconvenient for everyday transactions made by the general public. By definition, a currency is supposed to serve as a medium of exchange and a long-term store of value. However, since regular cryptocurrencies appear to be unstable, some users are hesitant to adopt crypto; they can’t predict the future value of their investment. Stablecoins then came into the picture to offer a solution to the price volatility of normal cryptocurrencies. Stablecoins allow crypto users to maintain their purchasing power with minimal risks of inflation.
Categories of Stablecoins
When you consider fiat currencies, the reason that they are more stable is that they are backed by reserves and are controlled by central banking institutions. Furthermore, fiat currencies are often also pegged to assets such as gold or forex reserves. These act as collateral protecting their values from sharp changes. So far, USDT is the most popular stablecoin.
In situations where fiat currencies change dramatically, central authorities step in to control the demand and supply as a way of stabilizing the value. The majority of cryptocurrencies do not have these essential features of fiat currencies. Stablecoins exist in various categories such as fiat-collateralized, crypto-collateralized, and non-collateralized crypto.
Is Stablecoin the Biggest Revolution in the World of E-Commerce?
Some crypto enthusiasts argue that cryptocurrencies have the potential to improve the efficiency and scale of the e-commerce industry. The current financial landscape may be functional — however, there are problems with it. The reliance on central controllers such as credit card providers who sometimes charge fees as high as 3% for transactions is a major downside to fiat.
On the other hand, blockchain technology allows buyers and sellers to carry out peer-to-peer transactions conveniently and independently of any third party. This way, cryptocurrencies such as stablecoins allow merchants and consumers to make and receive payments at a lower cost while circumventing central controllers. In recent years, stablecoins have been gaining traction in the e-commerce industry.
For example, Facebook’s Libra project has been making waves in the e-commerce and crypto worlds. Reputable financial organizations such as JP Morgan have clearly understood the need for digital currencies. Jack Dorsey’s Square company has been granted a patent for a system that will allow consumers to pay merchants with cryptocurrencies; thanks to stablecoins such as USDT, merchants will receive the same amount in US dollars.
Conclusion
Although the future looks promising for stablecoins and cryptocurrencies, many banking institutions are reluctant to adopt them because of regulatory risks. Central banks want to maintain their authority over the monetary supply chain so that they can monitor inflation and the growth of the financial sector. There is also the issue of data privacy.