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Stablecoins Explained – The Distinct Cryptocurrency Instrument

Data reveals that the overall market cap of stablecoins stands at over $140 B as of December 22, 2022. On top of that, the trading volumes gradually rise as the crypto instrument closes at the $900 billion mark. 

Investing in the digital asset world has become difficult for goal-oriented minds. However, the onset of stablecoins has proven to be a valuable tool for trading today.

Stablecoins can be described as cryptocurrencies tied to other valuable assets or commodities. Therefore, the crypto assets are barely affected by high volatility levels, unlike regular cryptocurrencies like Bitcoin, which fluctuate significantly. 

In essence, stablecoins introduce linking digital assets and traditional assets’ stability into play.

Forms of Stablecoins

Stablecoins exist in three different forms depending on the assets that back them.

Decentralized Stablecoins

Here, the stablecoins are tied to cryptocurrencies, while the pegging procedure occurs on a blockchain network via smart contracts. In addition, on certain occasions, users are granted crypto collateral loans locked in a smart contract.

The loans are payable once the value of the stablecoin elevates. Crypto-backed stablecoins are owned not by any entity but by a global network of users. Hence, it instills the idea of a decentralized ecosystem governing stablecoins and the crypto assets tied to them. 

DAI is an excellent example of a crypto-backed stablecoin running on the MakerDAO ecosystem. The stable asset is fully decentralized because it emerges once an investor deposits for it and disappears after repaying the debt.

Centralized Stablecoins

Centralized stablecoins are backed mainly by specific fiat currencies leveraging a fixed ratio level. Aside from well-known currencies (e.g., USD, EUROs), centralized stablecoins can be supported with other valuables such as silver, gold, oil, or corn.

The Gemini dollar is the leading centralized stablecoin designed to merge the modern-day U.S. dollar with an advanced digital setting. Built on the Ethereum network, the platform conducts monthly examinations of U.S. dollar deposits through a regulated accounting firm.

Algorithmic Stablecoins

Digital assets under this segment operate without another pegged asset or currency. Instead, specific algorithms govern the stability of a stablecoin, which estimates its price.

Key Benefits

Utmost Transparency

All stablecoin transactions are displayed on the public ledger to promote a transparent platform. Maintaining a transparent platform guarantees greater trust and accelerates new customer onboarding.

Swift Transactions

Transferring funds through a blockchain network is much faster, occurring within minutes and even seconds. Moreover, stablecoin transactions do not require third-party interventions, significantly lowering the waiting period.

Non-Volatile Instrument

Stablecoins assure investors of a stable investment option in a market full of unstable cryptocurrencies. Therefore, investors can freely trade stablecoins without getting into contact with any fluctuation issues.

International Payments

Stablecoins are transferable to any corner of the world since they are blockchain-based assets. Therefore, users can send stablecoins to their loved ones or any other recipient without unnecessary procedures that bring about delays.

Lower Transactional Charges

The traditional system typically charges a hefty fee for any translation carried out by them. It becomes a strenuous decision for investors who wish to make fund transfers. The decentralized setup for stablecoins allows the asset’s owners to trade at a very minimal fee. As mentioned earlier, stablecoins eradicate intermediaries who would charge you unreasonable fees to render their services. 

The Downsides

Centralization Aspect

Even with the decentralized architecture of stablecoins, the digital asset is owned by a central authority that oversees its minting and supply. Therefore, most stablecoins may operate similarly to the procedures of a regular financial institution

Algorithm Risks

There are chances that malicious individuals may tamper with the algorithmic configurations meant to stabilize a stablecoin. For example, third parties could implant a bug that interferes with the mechanisms for establishing a stable price.

Leveraging the Traditional Market

The primary objective of introducing cryptocurrencies was to replace the traditional financial system. However, stablecoins may sway away from that objective, mainly because their value relies on the conditions of fiat currencies, which are susceptible to inflation.

A Possible Future for Stablecoins

According to a letter from the Office of the Comptroller of Currency (OCC), stablecoins can be used as a payment medium through authorized banking institutions. Moreover, banks can operate as nodes on an independent node verification network to transact stablecoin remittances on the customer’s behalf.

The announcement came indirectly from the acting comptroller, Brian Brooks, who formerly served as a Chief Legal Officer at Coinbase. In a nutshell, the U.S.-based bureau emphasizes that banks can utilize stablecoins for any banking services.

Final Word

Investors have found cryptocurrencies to be lucrative, regardless of their uncertainties. Stablecoins provide an even better option as they count the frequent volatility issues on digital assets. 

Blockchain technology fuels the effectiveness of stablecoins by granting users the ability to transfer them across borders at a lower charge. In addition, countries like the U.S. have recently allowed stablecoin payments through banks, signifying the growing crypto adoption rates. 

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Stablecoins remain the most relevant digital assets as they interact with real-world fiat currencies. Incorporating a centralized and decentralized structure will eventually make it a highly dependable investment in the long run. 

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