Whether we like it or not, it’s quite evident that the world is slowly but surely entering an era of digital currencies. More and more cryptocurrencies come into the world with each passing day, governments are taking them more serious, and some even decided to make their own cryptocurrencies baked by their national currencies.
One of the biggest and fastest growing sectors in the crypto sector at the moment is represented by the so-called stablecoins. The currency worth of the stablecoin market is currently somewhere around $200 billion, and it consists of cryptocurrencies whose values are pegged to real-life commodities (like gold or the US Dollar).
What exactly are stablecoins?
There are numerous ways to define a stablecoin, but the simplest one is the following: stablecoins are cryptocurrencies which have their values linked to real-world assets. A stablecoin is a unique representation of a stable (and collateralized) asset blockchain largely used to hedge against the decline and volatility crypto collateral prices.
It may come as a surprise, but stablecoins are different from basic cryptocurrencies. That is because they are designed to satisfy the tokenization process and ensure no double spend or on-chain rehypothecation takes place.
In short, they’ve been introduced to provide a more or less perfect remedy against the ever-present volatility that’s been plaguing the sector of cryptocurrencies for so long.
Types of stablecoins
There are numerous types of stablecoins currently on the market such as fully collateralized, partially collateralized, uncollateralized, as well as asset-backed stablecoins, and algorithmic stablecoins.
Starting with the first, uncollateralized stablecoins are created to increase and decrease supply in the same way a bank buys and sells its debt in order to stabilize its purchasing power. The asset-backed stablecoins are those backed in a real, one-for-one way by reserves of the currencies they are pegged to. Even though the majority of stablecoins are linked to the US Dollar and Euro, they could, at least in theory, be linked to an asset.
At the time of this writing, the market is dominated by one particular stablecoin (90% of all stablecoin market value) that goes by the name of Tether. Tether is backed by the US Dollar and is based on the blockchain. This stablecoin has been purposefully designed to hold a stable value of $1 in all conditions.
As far as algorithmic stablecoins are concerned, they are not backed by any reserves but instead controlled by an algorithm. In short, this type of stablecoin uses software in order to match supply with demand as well as to maintain a peg to real-life assets such as the US Dollar.
Besides the types above, stablecoins can actually be divided into two major categories: crypto-supported or fiat-supported. The first has its value supported by popular cryptocurrencies such as Bitcoin or Ethereum, while the other has its value supported by fiat currencies or typical assets such as gold.
The present situation of stablecoins
Without a doubt, stablecoins are a big (and somewhat controversial) topic of discussion among experts of the cryptosphere. At the end of the day, though, stablecoins have numerous relevant use cases. One of the biggest arguments for using stablecoins has to do with their ability to serve as a medium of exchange.
Stablecoins can help anyone better protect himself or herself from the grueling market volatility. Another advantage of stablecoins is that they can be used as units of account and as a store of value. As stablecoins find their way more and more into the world’s economies, they are actively enhancing the much-needed crypto asset adoption. Volatility is often regarded as the primary drawback of cryptocurrencies, and that’s exactly why traditional financial institutions often refrain from using them.
As mentioned before, Tether is the dominant stablecoin currently on the market. It’s supported by the US dollar and has done wonders for changing the way cryptocurrencies are perceived. However, one of the biggest concerns experts have regarding stablecoins such as Tether is the fact that they are actually attracting some volume of centralization (being pegged to the Dollar)
The future of stablecoins
The future vision for stablecoins appears to be an optimistic one on all fronts, as they have the potential of changing the crypto scene (and improve mainstream adoption). Industry experts agree that they are the key factor in expanding the crypto user base. Stablecoins offer a solid relationship between digital coins and fiat currencies, one that can potentially free the sphere from all the perils of inflation.
As with most things in the exciting crypto world, the future of stablecoins highly depends on how well governments will establish governance over them. Even though there still a long road ahead, stablecoins can potentially replace the current fiat currency system. However, as mentioned before, to get there, the world of today needs a better defined global financial framework.
Stablecoins have a huge impact on the blockchain ecosystem, and we’ll definitely see more and more of them in the future. Nowadays, USD-based stablecoins are still dominating the sector. Stablecoins such as USDT, Circle’s USDC, Paxos Standard Token or TUSD is among the highest rated (by market cap) stablecoins.
Even though everyone has been speculating for years that cryptocurrencies are the future of our financial world, it’s the stablecoins that might actually have a better chance of taking the crown. There’s a good chance stablecoins will disrupt various important industries such as the payment industry, e-commerce operations, rent payments, wealth management, and the way we pay and receive our salaries.