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What are stablecoins?
Is Stablecoins the solution to the rampant price volatility in cryptocurrencies? This is the question in every crypto investor’s mind. Stablecoin cryptocurrencies development is key in regulating the high price volatility experienced in the cryptocurrency market.
Traditionally, the prices of cryptocurrencies have been very unpredictable. This has made them unreliable for both the users and merchants.
As the name suggests, Stablecoins have a consistent valuation. To achieve this, their prices are usually pegged on an existing financial asset. Examples include;
This means that their price correlates with the asset valuation. Pegging up their value reduces volatility. These capabilities have made them attractive and to investors.
How do they work?
For a Stablecoin to exist, there must a corresponding amount of assets in reserve. In case a Stablecoin is pegged on fiat money (the traditional money that we use today) there must be an equal amount of the fiat money in reserve. E.g. Stablecoin X is pegged on the dollar. For there to be 10X Stablecoins, there must be 10 dollars in reserve.
Below are the top Stablecoins in use today.
Tether is the oldest and the biggest stable coin in the market in terms of valuation. Initially, tether was valued against the dollar in the ratio of 1:1. However, the latest revelations show that tether reserves have a mixture of other assets including commercial papers.
As the market leader stable coin, tether has had its fair share of challenges. One of the key challenges being the famous BitFinex scandal.
However, the case has since been settled after an $18 million fine was paid. Despite the challenges, tether maintains the top spot with a valuation of over $50 billion. This makes it the third-largest cryptocurrency in market valuation closely trailing bitcoin and Ethereum.
DAI is a stable coin on the Ethereum network. It is valued against the dollar in the ratio of 1:1. It drives the development of Decentralized Finance (DeFI) services. Through Defi, developers can offer financial solutions that include lending and savings.
Offering these solutions through normal cryptocurrencies is challenging due to high price volatility levels. Hence, the need to utilize Stablecoin DAI capabilities.
Currently, DAI has a market valuation of $5 billion. This makes it among the biggest Stablecoins and cryptocurrencies in the market.
USD Coin (USDC)
USD COIN is a Stablecoin developed by Coinbase (One of the biggest crypto trading platforms). Its valuation is pegged against the dollar in the rations of 1:1.
USDC has a current market valuation of over $25billion. This makes It among the biggest top 5 Stablecoins in the market in terms of market valuation.
Unlike Tether that has a mixture of assets in its reserves, USDC has a full covering by the dollar. Termed as the digital dollar, USDC supports one of the largest ecosystems in offering various Decentralized Finance services. These include carrying out financial exchanges and offering loan products.
Paxos Standard (PAX)
Pax is a regulated Stablecoin. It is a money transfer cryptocurrency used across the world. Money transfer is a growing business driven by globalization.
Normally, the existing channels are slow and costly. Created as an alternative to tether, Pax’s success is based on the fact that it is regulated. A characteristic that most cryptocurrencies lack.
Regulations increase investors’ confidence making it more valuable and attractive. Pax is an example that Stablecoin developers can work in hand with regulators in making products that are innovative and operating within the law.
Binance USD (BUSD)
Just like Pax, Binance USD Stablecoin is regulated and its value is pegged against the Dollar in the ratio of 1:1. You can use BUSD to transfer money or as a transactional currency on crypto platforms.
One of the key advantages of using BUSD is that it has no transaction costs. This makes it affordable compared with the competitors. From its website, Binance USD works as;
- Medium of Exchange
- Store of value
- Method of Payment
Advantages of Stablecoins
- They enjoy the benefits of being cryptocurrencies with low price volatility. Stablecoins are cryptocurrencies created through blockchain. This makes them enjoy the crypto benefits including decentralization.
- They have low price volatility making them attractive to investors as the risks associated with erratic price movements are minimal.
- Most of them are regulated. This increases acceptability by the investors as their funds are more secure. The regulation also offers room for legal remedy in case of disputes.
- Stablecoins operate without the need for middlemen making transacting in them cheaper and faster.
- Stablecoin is enabling the drive for greater financial inclusion through the creations of DeFI solutions.
- They offer a store of value capabilities. This brings a necessary competitive alternative to the traditional alternatives including precious metals (Gold and Silver).
- They act as hedging tools in the cryptocurrency markets in case there are huge price movements.
Challenges of Stablecoins
- The stability of a stablecoin is pegged to the stability of the reserve asset. In case the asset faces challenges, the same automatically affects the stablecoin.
- Regulated Stablecoins lose the cryptocurrency characteristic of decentralization. By reporting to the central control authority, they are no longer free currencies as envisioned.
- They are prone to fraud and artificial manipulation. A key example is the tether scandal.
- Stablecoins present inherent challenges in controlling money laundering activities and monetary policy implementation. This happens mostly if the stablecoin is unregulated and has weak Anti Money Laundering controls. The decentralized nature also makes it harder to track money movement by the relevant authorities
- Stablecoins face stiff competition from the established financial assets offering similar solutions. These include the traditional fiat money and money remittance systems.
Future of Stablecoins
Due to the above-mentioned benefits, Stablecoins are becoming key components driving the future of cryptocurrencies. By combining both characteristics of stability and decentralization, their role is expanding tremendously.
There is increased interest from the global financial players in developing their own Stablecoins. This will see them offer innovative financial solutions.
The role of the regulators on cryptocurrencies regulation is expanding and will likely deepen in the future.
Stablecoins are the bridge between fiat money and cryptocurrencies. This combination makes them more attractive and acceptable to both the investors and the regulators.
Based on both the market growth and price growth experienced in recent years, Stablecoins momentum will keep expanding.