Defining Stable Coins-
The United Nations have recognized the use of 180 currencies across the world, right from the European euros to the US dollar to the Saudi dinars and many more. And all over the world these currencies are used to buy goods and services. Regardless of stock market fluctuations, inflation, or any other global factors, these currencies don’t change much in their value and are subject to minor little changes on a recurring basis.
This has been a trading trend for a long time which facilitates economies to operate through government-issued currencies. This can be understood with our day to day chores where we can buy a loaf of bread from any bread store and pay for it around $3-$5. It is very uncertain that the price would drastically drop to 99 cents tomorrow.
Likewise, Stablecoins are a form of digital currency that is subjected to replicate the traditional stable currency. Basically, a stablecoin is a type of cryptocurrency which is collateralized to the worth of a principal asset. To put it simply, a stablecoin is a digital currency that is attached to a particular asset that owns a “stable” value.
A lot of stable coins are pegged at a 1:1 ratio in comparison to some fiat currencies, for example, the US dollar or the Euro, which are used for trading on exchanges. On the other hand, some other stablecoins are pegged to different kinds of assets, for example, precious metals like gold, or even to other cryptocurrencies.
Types Of Stable Coins
Let us look into the types of stable coins available in the market and their potential across the three major categories.
These stablecoins have the backing from an accessible currency such as the US dollar. The company that issues them holds assets in a bank account or vault or it can also associate with a third-party provider who can do so on its behalf. In this type, the coin symbolizes a claim on the underlying assets. The same is in the case of those stable coins that are backed by precious metals like gold or any other.
Fiat-collateralized stablecoins are the simplest type and easy to understand for the ones who are new to crypto, and clings on to the most popular onboarding means into the cryptocurrency world. Hence, this makes them the most trusted type by retail consumers than other cryptocurrencies owing to its simplicity and elegance. It is to be noted that, not every fiat currency is stable, as the fiat that triggers them, might not be stable in it. For instance, one has to have faith in the US Dollar to hold a USD backed stablecoin. Some well-known examples of fiat-backed stablecoins are tether, TrueUSD, USDCoin, and Gemini Dollar. The initiative of additional stablecoins pegged to a wider variety of fiat currencies will be essential and in the near future, we can anticipate more issuers to come forward and fill in the demand of this arena.
Crypto-collateralized Stablecoins –
This type of stable coin has the backing of mixed decentralized crypto assets. The most beneficial fact about Crypto-collateralized stable coin is that it is decentralized and is for that reason not vulnerable to a central point of malfunction. However, one of its shortcomings is that in spite of their mix of assets designed to lessen volatility, in today’s vague bear market, any mix of crypto assets will be believed unstable. MakerDAI is one of a notable example of Crypto-collateralized stable coin which holds a strong stable position despite the market volatility in the past years.
This type of stablecoin sustains its stability with the use of an algorithm, which means they are not backed by real-world assets like the above two types. While dealing with Non-collateralized Stablecoins certain trust should be made in the system to expect it to gradually gain a positive amount of future value like the same in the case of bitcoin. This model is designed to create two tokens where the first is simply a stable coin but the other is akin to a bond hopeful income if the stablecoin increases in price. With the purchase of the bond in this type of stablecoin, the supply is bound to decrease. Non-collateralized Stablecoins are a very innovative type of stablecoins and at the same time quite difficult to deal with it successfully. An example of it is the now-defunct Basis project.
The Future OF Stablecoins And Its Benefits In The Market
The near future promises the arrival of the second generation of branded stablecoin ventures that may include secondary market liquidity, loyalty program integration, and branding prospects.
The emperor of Social media- “Facebook” popularly known as FB and top bank player JPMorgan Chase-JPM both envision a stablecoin. With the arrival of Facebook’s Libra, it is expected stablecoins from many major brands with a huge customer network like Delta. Even Amazon (AMZN) is likely to jump in too with its expansion into more markets. At the same time, China’s central bank is leading this league by issuing its own stablecoin in the works which analysts notify could take over emerging markets.
In addition, the governor of the Bank of Canada has mentioned stablecoins in his 2020 vision. However, just like all other inventions, even stablecoins are countered with few conundrums but its potential benefits are much higher. It is wise and essential on the part of financial analysts to envision far-sighted regulatory administrations that will serve to rally up with the challenge and guide in a less fluctuating future for the stablecoin cryptocurrency.
So it won’t be wrong to quote that stable coins are a type of digital currencies, which have drawn considerable interest among investors, and is foreseen to be used by many different applications including day-to-day transactions and remittances. Investors also aim at using stable coins to potentially leverage the hedge against the ever-changing market volatility which can eventually assist them to harness in opening and closing positions.
Despite the benefits stablecoins still face various obstacles, especially a lack of widespread adoption and trust. Fortunately, this barrier is being resolved by centralized entities that are striving to establish this trust that ensures a trustworthy reputation. Without a doubt, if we begin to consider how stablecoins have evolved in the past few years, it is prominently evident that businesses with global operations can benefit greatly by engaging with the stablecoins.