What is a stablecoin?

stablecoin

Surely today, you know someone who is interested or invests in cryptocurrencies. With the appearance of Bitcoin in 2009, a new perspective opens within the financial market. A new digital financial system has been created that is becoming a very serious competitor against the only financial system that existed.

Since 2010, a large number of new cryptocurrencies have been created. This new financial system came with a problem, and that is price volatility. This is one of the reasons why many people refused to adopt this digital money.

For all these reasons, the Stablecoin or stable cryptocurrencies arise. They are not affected by volatility, as their prices are stable. This digital currency arises to offer investors relative stability in the current market.

¿What are the Stablecoins?

A stablecoin is a digital asset pegged to “stable” fiat currencies like the dollar or euro. This digital currency aims to guarantee the stability of the exchange rate in the market, reducing the volatility of unbacked cryptocurrencies such as Bitcoin.

Stablecoins make it much easier to take profits or freeze them in a relatively stable cryptocurrency, allowing the possibility of making daily purchases or waiting out periods of large fluctuations. It is like a bridge between the currencies we use daily and the world of cryptocurrencies.

Its values ​​are linked to a relatively stable reserve asset, such as gold or the US dollar. The result is lower price volatility, and a new type of digital currency that fits into anything.

This type of digital currency behaves in the same way as any cryptocurrency, and, like the previous one, it is available on a blockchain. They have all the values ​​that a cryptocurrency enjoys, but without the intense volatility of the different types of digital currencies.

¿How they work?

Stablecoins are cryptocurrency tokens, so they are issued on blockchains. To reduce volatility and achieve stability, they are tied to other assets that must have value. Although not all of these currencies are linked to fiat currencies or gold, they can often be linked to other cryptocurrencies.

In order for companies to issue these digital currencies, they must deposit an equivalent amount of FIAT currency, such as euros, US dollars or yen, into bank accounts. This peg to real word assets like regular currencies allows stablecoins to avoid the price volatility so common in cryptocurrency markets.

As we have mentioned before, stablecoins can be linked to other types of currencies, so they have other forms of backing. In addition to those mentioned, they can function as the following assets:

  • Commodities: they are raw materials such as gold, silver or oil. It is very common to find stablecoins linked to this asset.
  • Cryptocurrencies: it is their link to other crypto assets. This system leaves aside the vision of achieving a stable currency centered on fiat currencies. A token is backed by the reserves of a cryptocurrency.
  • Stable tokens: it is linked to stable tokens but that do not have a direct backing of another asset. They have no guarantee of stability.

Advantages of Stablecoins

Stablecoins have numerous advantages, and they can bring you a lot of benefits.

  • Minimize volatility

The value of cryptocurrencies like Bitcoin and Ether is in their low volatility, which allows them to offset movements in other virtual currencies. An asset pegged to a stablecoin is going to ensure that the value of your tokens will not suddenly rise or crash in the near future.

  • Save actives

Trading or saving money is easier than with the traditional banking system. With stablecoins it is not necessary to create a bank account, and their transfer is easier than with traditional currencies.

  • High mobility and international shipments

Stablecoins can be shipped anywhere in the world, even to places where the local currency is unstable or a US dollar is very hard to come by.

The digital and decentralized nature of the Blockchain allows this type of cryptocurrency to have great mobility and ease in its exchange system. Transferring coins is done in a much more transparent way.

What is the future of the cryptocurrency market?

The Bitcoin blockchain was the chain that created the entire cryptocurrency movement. It was originally developed to bypass financial institutions. With this, the Stablecoins were developed, which are halfway between the decentralization of cryptocurrencies (Bitcoin) and fiduciary currencies of centralized management, such as the euro or the US dollar. Both hybrid instruments have grown enormously.

Stablecoins are not the same as traditional cryptocurrencies. Its operation has led to a situation that surprised many in the cryptocurrency market. That system that was originally created to bypass those financial institutions now needs the support of those centralized financial organizations, which are playing an increasingly important role in the cryptocurrency universe.

This type of digital currency has created that dialogue and dependency between financial institutions and governments, which play a fundamental role in the evolution of stablecoins. Thanks to this, cryptocurrencies continue to grow and are accepted more and more, both by people and by financial institutions and current governments.

Stablecoins have been a before and after in the world of cryptocurrencies. They offer possibilities that initially were not typical of this type of asset, and they have achieved a balance between governments and financial institutions, something that seemed difficult to achieve. Its features offer numerous advantages, and, although they are still evolving, they are an asset that has a great future in the world of cryptocurrencies.

Leave a Comment