Stablecoins and the Role They Play in the Digital Market

By AsianMarketCap Official on The Capital

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The next evolution of financial markets is now here and it aims to use blockchain technology as the world gradually losses faith to the traditional financial system which is centralized and controlled by the government or by a single entity.

With over 100 projects on the market, stablecoins seem to lead the mass adoption of digital payments. As we adjust ourselves to a new norm of cryptographic finance, this article aims to give an introduction to the intricate world of stablecoins and the role they play in the digital space.

STABLECOINS DEFINED

Stablecoins aims to become global, fiat-free money that is programmatically issued and tracked with the use of blockchain technology. Stablecoins fall into the category of payment tokens, which have main purposes of becoming a store of value, medium of exchange, or unit of account. StableCoins make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold. Unlike other cryptocurrencies, like Bitcoin and Ethereum, stablecoins by design, aim to achieve stability and decrease the volatility that is frequently associated with the cryptocurrency markets. They strive to achieve their main benefits such as price stability, scalability, privacy, decentralization, and redeemability.

Stablecoins fall into these 3 categories:

FIAT-COLLATERALIZED STABLECOINS

These are stablecoins that are backed by an existing currency such as the USD, Euro, or GBP. The issuing company holds assets in a bank account or vault or works with a third-party provider that does so on their behalf. The coins represent a claim on the underlying assets. These stablecoins are simple, elegant, and more easily trusted by retail consumers than other cryptocurrencies. However, one should take note that these coins are issued by centralized entities with their own governance protocols and, in the case of full custody integration, can be prone to fraud. Additionally, not all fiat currencies are stable, as the fiat that underlies them, may not be stable itself. Notable examples of fiat-backed stablecoins include tether, TrueUSD, USDCoin, and Gemini Dollar. These specific stablecoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure, and stable daily transactions.

CRYPTO-COLLATERALIZED

These are backed by a mix of other decentralized crypto assets. The benefit of this method is that it is decentralized and is therefore not vulnerable to a central point of failure. This allows for better risk distribution; the volatility risks for a single cryptocurrency is much higher than that of a combined group of cryptocurrencies. The downfall is that despite their mix of assets designed to reduce volatility, in today’s uncertain bear market, any mix of crypto assets will be deemed unstable. The most notable example is MakerDAI, which, despite the past year of market volatility, has proven stable in the short term.

NON-COLLATERALIZED

These are stablecoins that maintain stability using an algorithm, meaning the coins are not actually backed by real-world assets. Instead, trust in the system is reliant on the expectation that the coins will gain a certain amount of future value, similar to Bitcoin. These models are generally created with two tokens: the first is a stablecoin, and the second is akin to a bond promising income if the stablecoin rises in price. By purchasing the bond with the stablecoin, supply is decreased. These are the most innovative of stablecoins and also the most difficult to create successfully. A notable example includes the now-defunct Basis project.

FINAL THOUGHTS

Stablecoins are digital assets that are pegged to fiat currency or other financial assets. Initially created to solve the volatility issues of cryptocurrencies, stablecoins have evolved to provide more utility. The total addressable market for stablecoins is essentially all of the money in the world, or approximately $90 trillion.

Stablecoins are frequently dubbed as the ‘holy grail’ of financial technology. Their vision is way bigger and broader than that of Bitcoin. They promise an on-ramp into the crypto world that a retail user can easily trust and understand, paving the way for wider acceptance and adoption of programmable money and securities. A successful stablecoin may challenge the legitimacy of the current myth of money backed by weak and centralized governments around the world.

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