- Stablecoins are like cryptocurrency in many ways but with different backing
- Cryptocurrency continues to fascinate the world
- Keeping current in the world of cryptos is important
Although whether stablecoins should be regulated or not is a subject of national debate among community members, it does have some potential to revolutionize not only the crypto sphere but also the consumer market. This leads us to these questions: what is stablecoin? How does it work? And, more importantly, why could it be the next big thing? Let’s find out!
What Is Stablecoin?
A stablecoin is defined as a cryptocurrency that is pegged to another asset, usually fiat currency. This means that its value is relatively stable and not as volatile as other cryptocurrencies. For example, Tether (USDT) is pegged to the US dollar and has a value of $1 per Tether.
What makes a stablecoin unique is that they are not backed by any physical commodity, they’re usually backed by fiat currency, making them a part of the “world’s first decentralized fiat-backed currencies” category. In this case, Tether (USDT) was reportedly valued at $1 per token when it was launched in 2015.
How Does It Work?
Stablecoins are pegged to the value of another asset, usually USD. To maintain this peg, some mechanisms have been put in place that aims to keep its value stable. Let’s take Tether (USDT) for example. This dollar-pegged token is backed by assets in an audited US bank account, which means that it has a 1:1 reserve ratio. In other words, for every Tether in existence, there is an equivalent USD held in reserve.
Benefits of Stablecoins
There are a few benefits of stablecoins, including (but not limited to):
1. Low volatility:
One of the main reasons why cryptocurrencies are facing a lot of challenges when it comes to mainstream adoption is because they’re very volatile. But when it comes to stablecoins, their value is usually pegged to another asset, so it’s only logical that they won’t be as volatile as other cryptocurrencies on the market.
2. Transparency:
With stablecoins, there are no middlemen involved when transferring assets across the network. It is because of this reason that some people think these currencies can be used by consumers when buying and selling online.
3. Fast transactions:
Since there are no middlemen to slow things down, stablecoins can process transactions much faster just like cryptocurrencies. In fact, it only takes a few seconds for a stablecoin transfer to be completed.
4. No transaction costs:
Just like cryptocurrencies, stablecoins don’t have any transaction fees. This makes it a more cost-effective way to send and receive payments. Consumers don’t have to worry about hidden fees when transferring funds as well.
Why Could It Be the Next Big Thing?
Now that we know what stablecoins are and how they work, it’s important to understand why they could be the next big thing.
1. They’re backed by fiat currency
As mentioned earlier, stablecoins are backed by fiat currency so it’s only logical for them to gain more popularity in the mainstream market. The value of cryptocurrencies is usually unstable but because stablecoins are tied to fiat currencies, there is less risk involved when using them as a replacement for other traditional currencies.
2. They have real-world uses cases
Aside from being used as a replacement for traditional currencies, stablecoins also have real-world use cases. For example, Tether (USDT) is often used by exchanges to prevent price volatility. It’s also been used to stabilize the prices of digital assets and has been quite successful in doing so.
3. They’re faster and cheaper to use
Just like other cryptocurrencies, stablecoins are also faster and cheaper to use. This is because they don’t have any transaction fees and the transactions are completed in a few seconds. This makes it a more efficient way to send and receive payments.
4. They’re transparent and secure
Since stablecoins are transparent by nature, they’re considered to be more secure than other internet-based digital payments. This is because the transactions can be easily tracked and verified.
The Future of Stablecoins
Even though stablecoins are still in their early stages, they have the potential to become the next big thing. Their popularity is slowly growing and more people are starting to see the benefits of using them. We can expect to see more stablecoin projects in the future as developers continue to work on improving their functionality and security.
