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Stablecoins refers to an asset class in cryptocurrency whose value is pegged on some external or reserved asset. Often, this external asset might be a fiat currency, such as an Indian Rupee or the US Dollar. Stablecoins are very popular alternatives to the existing cryptocurrencies and can bring about ‘stability,’ as the name suggests, to the trading of crypto.
Bitcoin has been known to be a notoriously volatile asset. For example, in late March 2020, Bitcoin volatility was as high as 11%, a peak in years of almost always remaining under 8%.
This volatility is something that stands as a barrier to the paramount heights cryptocurrencies can attain. A concept that combats this with ease is stablecoins. Their benefits include the fact that they bridge the gap between fiat currency and cryptocurrency. In order to ensure that cryptocurrency reaches the level of the stock market, we must study these benefits in detail.
The benefits of stablecoins
Maintaining Price Stability
Stablecoins are safe and non-volatile assets. They have a value that does not suffer from severe fluctuations like other cryptocurrencies. This makes it an ideal option to invest in. Further, being the crypto equivalent of an asset, based on the concept of the derivative, they reduce risks dramatically.
Heavy Security due to their model
Stablecoin prices and network models are all operated from a decentralized, public blockchain network. This not only ensures full transparency to all users but curbs the risk of cyber threats occurring. Further, since trusted sources back them, nobody really doubts them.
Time Efficient
Stablecoins make the whole transaction process quicker. They are implemented with smart contracts which work autonomously. Since a central authority doesn’t regulate them, financial transactions can be done at any time and faster too.
Lower transaction fees
Already, the crypto world has much lower transaction and processing costs than in the real world; this is the same for stablecoin transactions. Rather than worry about a large percentage being cut off as duty, the amount here is minimal.
Borderless Transactions made easy
Another noteworthy point is its efficiency when it comes to cross-border payments. Usually, cross-border transactions must pass through multiple checkpoints, which delays the speed of payment substantially. This problem is easily mitigated using stablecoins because of the previously mentioned blockchain model.
Types of Stablecoins
Here are the various types of stablecoins available based on the working mechanism:
Fiat-Collateralized Stablecoins
The type of stablecoins where the reserve asset is some fiat currency is known as fiat-collateralized. Here, ‘collateral’ refers to an asset that can be used in exchange for a certain amount of cryptocurrency. These reserves are regularly audited by independent custodians so that they adhere to real-world values. An example includes the Synthetic USD.
Crypto-Collateralized Stablecoins
In crypto-collateralized stablecoins, the reserve is another cryptocurrency. Since other cryptocurrencies are highly volatile and the purpose of stablecoins is to mitigate this volatility, these coins are ‘over collateralized.’ That is, to maintain a reserve of a smaller number of stablecoins, a large number of crypt tokens are kept aside.
Non-Collateralized Stablecoins
Non-collateralized stablecoins (or algorithmic stablecoins) are not pegged on any external product but maintain their price stability by depending upon some working mechanism. For example, a stablecoin may work on the consensus mechanism to regulate the supply of tokens of some cryptocurrency.
This is akin to issuing fiat currency in a bank; however, it is implemented using smart contracts since it is done on an autonomous, decentralized platform.
Some of the most popular stablecoins in use are Tether, Paxos, Binance USD, etc.
The asset of the future
Stablecoins are bits and pieces of code that work together. This means that they can be configured and features added to them based on the user’s requirements.
When we look at the existing uses of stablecoins, we can see that they’re heavily weighted towards cryptocurrency trading. Stablecoins have a lot of uses and can also be used to hold bigwig national fiat currencies accountable. In times of political upheaval, they also provide security, stability, and financial options. Further, they can also make deposits, remit money, lend money, resolve settlements, and serve as a bank substitute.
Remittance is the most important of the uses because of cross-border transfers and sending money across nations. In a pandemic creating a stir, international payments were the ones affected most, but now, with the benefits of the stablecoin, it doesn’t have to be that way anymore.
Source: Siddharth via Twitter
At WazirX, we get front-row seats to how significant a role stablecoins can play in the future. Already, an astonishing amount of trades on our exchange occurs using USDT pairs, from the larger $350 million volume we process in a day.
Frequently Asked Questions
How To Invest In Cryptocurrency?
There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.
Is Ethereum Safe To Invest?
The Bitcoin market is unquestionably more volatile than the stock market. This may not be the market for you if you are incredibly risk-averse. Ethereum, on the other hand, may be a terrific investment for you if you're a diamond-handed investor who won't lose sight of short-term losses. Ethereum is a relatively safe investment as it is also based on blockchain.
How To Invest In Cryptocurrency In India?
There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is the process of verifying and adding transactions between users to the blockchain public ledger. Purchasing cryptocurrency in India is a straightforward procedure where investors simply participate by registering with a crypto exchange such as WazirX. After registering for an account, citizens can trade multiple cryptocurrencies, store cryptocurrency in wallets, and more.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
What Is The Safest Cryptocurrency To Invest In?
Bitcoin has had the highest market capitalization, has been around the longest, has the most experienced development team, and has enormous network impact and brand recognition. As a result, while trading cryptocurrencies, the rate of return on Bitcoin is commonly used as a benchmark. However, the risks associated with cryptocurrencies remain, and the safest cryptocurrency for you depends on your analysis.
What Is Virtual Currency?
Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.
Is Pi Cryptocurrency Safe?
Pi Network captured the crypto community’s interest even before it officially debuted. Its innovative mobile mining approach and user-friendly design simplify crypto adoption for a broader audience. Some users see this as a chance to get engaged in the crypto from the beginning and profit in the future, similar to how early Bitcoin adopters made huge profits by mining and keeping the coin. Other users have compared Pi to a worthless multi-level marketing (MLM) scheme.
How Cryptocurrency Works?
Cryptocurrencies use cryptography technology to keep transactions and their units (tokens) secure. Cryptocurrency works via a technology called the blockchain. A blockchain is a decentralized technology that handles and records transactions across numerous computers. The security of this technology is part of its value.
How Safe Are Cryptocurrencies?
Cryptocurrencies can be safe, but your crypto wallets can be hacked if proper security steps are not performed. There are also dangers and uncertainties associated with investments, and we cannot declare any virtual currency investment risk-free. Buying and selling cryptocurrencies does not have to be dangerous if the trader is well-versed in the market and treats his coins with care.
Is Cryptocurrency Safe To Invest In?
Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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