All about Stablecoin

Volatility meaning, Isn't the only thing cryptocurrencies are about. Stablecoins are created with the intent to keep a set price. There is a huge market for currencies that combine the advantages of blockchain technology with the capacity to track a more stable commodity, especially in a sector where coins and tokens might crash overnight. It is worthwhile to educate yourself about stablecoins and the advantages and disadvantages they have if you haven't already begun utilising them for trading or investment.

Definition of stablecoin:-

“Stablecoin is a digital currency that is stable through the reserve of some assets like gold, US Dollar.”  Because the prices of stablecoins are tied to a reserve asset like the US dollar or gold, they serve as a bridge between the worlds of cryptocurrencies and conventional fiat money. In comparison to something like Bitcoin, this significantly lowers volatility and produces a type of digital currency that is more suited for everything from daily business to conducting payments between exchanges. For example, businesses might accept $5 in Bitcoin for a coffee one day, but the next they might discover that their Bitcoin is worth 50% less. Planning and running a company that takes cryptocurrency payments is therefore difficult. 

Before, traders and investors in cryptocurrencies lacked a means of locking in profits or avoiding volatility without first turning their holdings into cash. These problems were easily fixed with the development of stablecoins. Today, stablecoins like TrueUSD (TUSD) make it simple to enter and exit the volatile cryptocurrency market.

Some examples of stablecoin:-

USDT – US Dollar (Tether)

PAX – US Dollar (Paxos)

THKD – Hong Kong Dollar (TrustToken)

GUSD – US Dollar (Gemini)

sEUR – Euro (Synthetix)

USDC – US Dollar (Circle & Coinbase)

DAI – US Dollar (MakerDAO)

BUSD – US Dollar (Binance)

How is stablecoin work:-

The work of stablecoin is to tether their market value to an outside standard, often a fiat medium than more volatile cryptocurrencies. Stablecoin can be linked to a currency, such as a commodity, like gold or they can utilize an algorithm to regulate supply. Additionally, they keep reserve assets on hand collateral or by using supply-controlling algorithms. Once you invest in the stablecoin, it’s providing a way for investors to hedge against market volatility. Stablecoins are used for a variety of purposes, including trading, remittances, and payments. The stablecoin market expanded in 2020–2021, with a nearly threefold increase in market valuation. 

Why use stablecoin?

A stablecoin is a representation of a value regulated by central banks and serves as a reserve of value and unit of account when a cryptocurrency is backed by a fiduciary currency or by a precious metal (gold).

You can now purchase real estate with stablecoin, or create interest on loans. It is a payment or exchange solution. Stablecoins are open,  accessible to anyone, and global in USDT to INR on the internet, 24/7 time. They communicate quickly, inexpensively, and securely, also we can see a trading view. They can be programmed and are digitally native to the Internet.

Advantages of stablecoins:

1. Low fees: Stablecoins have low trade fees and also users can do intraday trading. Stability is important to both individuals and businesses. Cryptocurrencies haven't been widely adopted for everyday payments because of their volatility. Large stablecoins are suited for everyday use because they have a history of keeping their peg.

2. Secure transaction:  Users can transfer stablecoin with higher security. Because stablecoin work on blockchain technology and they are designed to maintain stability. With these coins rare chance to go low price so, once users invest then money will be secure.

3. Traders and investors can use portfolio hedging: Stablecoins can be used to lower overall risk by making up a portion of a portfolio. You'll have money on hand in case a fantastic opportunity arises, and your portfolio as a whole will be more resilient to changes in market value. During a market slump, you can also exchange your cryptocurrency for stablecoins and then buy them back at a lesser cost.

4. Regulation: When it comes to disclosures, what assets are kept in reserve to back the coins, and redemption rights, stablecoins are operated under a variety of laws that are governed by a patchwork of state regulations.

Disadvantages of stablecoins:

1. Centralization:  However stablecoin is a technology nothing else. The majority of their digital currencies are just fiat currency kept in mobile wallets or online accounts, which is a breath of fresh air for the stale world of finance and cryptography.  Now centralization is the biggest problem and risk associated. Because almost each digital currency work on blockchain technology and this technology is designed to truly decentralize so, there is no single party that has complete dominance of the technology.

2. Inadequate transparency: A layer of transparency and immutability that other technologies, like the Internet, can't offer was also planned to be added. This is generally accurate. On public blockchains, transactions are transparent and unchangeable. They cannot, therefore, be controlled or altered by one party. Unfortunately, stablecoins do not work like this. The stablecoin is frequently managed and controlled by a single company through off-chain trades and transactions.

3. Less return on investment:  Even though they are less volatile than other cryptocurrencies, they nonetheless offer comparatively lower returns on investments.  Investors and traders desire higher returns and may restore from other financial means.

Conclusion:

After considering all points we can say there are risks associated with everything, especially with the digital currency it doesn’t mean it is stable or not. This dynamic era will develop, expand, and splinter into new regions at the speed of light. This is fantastic and, in the opinion of many, exactly what the blockchain industry needs. We see how it is risky for centralization. Its model is fully based on decentralized creates problems for those working on centralized platforms. Additionally, low fee structure and security make stablecoin more beneficial for those who investing in stablecoins.

by Monika Gupta