Cryptocurrencies became the talk of the town soon after their prices started hitting higher highs every other day in 2017. But when the bull run ceased in January 2018 and the cryptocurrency markets bathed in red, all the appreciation and popularity started turning into condemnation. The markets lost between 80 to 90 per cent of its valuation from the all-time-high in less than a year.
While the markets have achieved great levels of maturity in the past two years, cryptocurrencies still remain highly volatile. This makes cryptocurrencies and their actual benefits a forbidden fruit for common people.
To remove this barrier of volatility and allow people to experience the digital currency space without risking the total value of their funds, innovators developed stablecoins.
Stablecoins do not completely embody the characteristics of traditional digital currencies, but their base blockchain layer still imparts them the most crucial features needed for a secure and transparent cryptocurrency.
What are stablecoins?
Stablecoins are a new class of cryptocurrencies whose values are pegged to an underlying asset such as a fiat currency, commodity, or another cryptocurrency.
The most commonly known stablecoins such as Tether (USDT) or USD Coin (USDC) are backed by a fiat currency, which, in these two cases, happens to be the United States dollar. The value of a stablecoin maintains an approximately 1:1 ratio with the fiat currency that backs them. This makes it similar to the regular currency we use except that it is digital and its transactions happen on the blockchain.
This is how they maintain a stable price and keep their users safe against market volatility.
Stablecoin use cases
We can potentially use stablecoins in as many ways as we today use our bank notes, but with added transparency and security. Let’s take a look.
The disruption of remittances is a promising use case of stablecoins on blockchain technology. By using stablecoins, we can negate the use of bank institutions and middlemen in the transaction process. This will help transfer money globally without paying a hefty fee to financial institutions.
Although most merchants may dislike the idea of receiving payments in other cryptocurrencies due to their volatility, stablecoins can act as an efficient alternative. By opting for stablecoin payments, they can avoid the transaction fee charged by financial service providers for credit and debit card payments.
Cryptocurrency markets sometimes rise and fall by 10 to 20% within hours. And no cryptocurrency trader stays on the market 24*7. They can use stablecoins as a safe haven to store their funds in cryptos and directly buy and sell cryptocurrencies using them.
Our current banking system fails to reach almost 1.7 billion adults worldwide. By using stablecoins, most digital financial services similar to banks can be offered to the unbanked population. All they will require is internet connectivity. Additionally, they will be in full control of their funds, unlike what it is when one stores money in bank accounts.
Stablecoin is a major step towards bringing the masses to use digital currencies and realise how they are more efficient compared to our traditional financial system. With major banks and companies experimenting with stablecoins, the time is not far when we see them become an important part of the global financial landscape.