Everything you need to know about fiat-pegged stablecoins.

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    By Amee Mehta
    Apr 8th, 2020
    For the uninitiated, Stablecoins arose as a response to the volatility of cryptocurrencies. The values of these Stablecoins are pegged to fiat currencies, thereby assuring controlled volatility of the user.  We’ll be discussing everything you need to know about this new kid on the block in this article! 

    An Introduction

    Stablecoins are digital currencies with values tied to existing currency - like the US Dollar, European Euros, or UK Pounds. Theoretically though, they can be tied to any asset. In doing so, Stablecoins make sure that the adverse volatility of the marketplace does not lead to any loss of value. It is this feature that distinguishes Stablecoins from other cryptocurrencies. 

    Some features of Stablecoins

    Every Stablecoin, ideally, posts the below-listed features / qualities: Price stability: Stablecoins, pegged to fiat currencies, provide assured stability as the user can project and hold the Stablecoin based on the value of the underlying currency. Value stability: Although Stablecoins can, at times, depreciate when compared to other currencies, there is no denying that the stability of value is largely assured.  Enhanced privacy: Stablecoin holdings also assures a degree of privacy, simply because it is not easily accessible or even reflected anywhere except for with the wallet holder.  Decentralization: These fiat-pegged currencies enjoy varying degrees of decentralization, which is mostly true for anything that is Blockchain-based. Stablecoins are also fairly easy to buy and sell. 

    How do you build a Stablecoin

    It can be said, without a doubt, that cryptocurrencies are truly changing the world and have become an integral part of today’s tech-fueled world. The presence of Stablecoins just strengthens this narrative.  If you’re interested in knowing how to create Stablecoins, this section will interest you.  Typically, Stablecoins have the following structure: Reserve-Backed (issued on a collateral receipt): Some Stablecoins follow a tight structure. What that means is that issuance can only be made on presentation of Stablecoins for its circulation. That is, for a given unit of Stablecoins to be released for circulation, it is essential to provide the exact fiat-currency collateral. The most common example of this type of a Stablecoin is Tether. The promoters of Tether claim that the cryptocurrency is backed 1 for 1 by the USD. Another example is USDC.  Algorithm-Driven: Algorithm-driven Stablecoins are propelled by responding to the dictates of demand and supply in a scientific manner. By monitoring the market status using targeted tools and software, the promoters of these Stablecoins can match the demand to a corresponding supply. While this seems complicated, it is extremely practicable and requires just the right infrastructure to make this possible. Two common example here can be Carbon and Terra. 

    Use Cases of Stablecoin

    When it comes to cryptocurrencies, the biggest players in the market are exchanges. Incidentally, they also constitute the biggest set of Stablecoin users. The best cryptocurrency exchanges have to hedge against price volatility by holding some of their reserves in this fiat-pegged asset. Another reason for exchanges using Stablecoins is to boost the liquidity base. Since not all crypto exchanges have access to banking services, Stablecoins truly become a vent. The leading Stablecoins as of today command respect in many countries, and since their underlying fiat-based value is believable, they also serve many purposes here.  Exchanges can readily swap Stablecoins for any crypto-asset of their choice, and meet the required users’ demand. In the same vein, these cryptocurrencies are also near-cash assets, thereby ensuring immediate liquidity whenever needed.  For exchanges that support fiat transactions, Stablecoins can help meet this line of demand. Users can also leverage the power of Stablecoins to hedge against the losses in a bear market. In the times when bulls rage, these Stablecoins can be used to buy any crypt-asset of your interest.  Other uses of Stablecoins are currently under exploration, and they include payment on dividends on smart contracts, insurance, and other recurring payments. 

    Benefits of Stablecoins

    Stablecoins became the center of attraction of new crypto product offerings during the year 2018. As of year-end 2018, there were not less than 57 stablecoins available as existent ready-to-launch products. Since the year experienced more bearish sentiments, it was only logical that investors saw Stablecoins as a desirable opening. In some quarters, stablecoins have risen to the occasion especially for usage in overseas remittance. The reason for this is that their values are at par with fiat which makes people increasingly comfortable with their use. So, in a sense, high overseas remittance fees can be easily avoided by sending Stablecoins to the recipient. For public investing, the crash in the market price of Bitcoin was indeed an eye opener. Stablecoins have become a shield against loss of value. By shifting crypto holdings to USDC or DAI, the investor avoids the peril of value loss significantly. As many stablecoins are traded round the globe, it is way cheaper to transfer them to certain jurisdictions than transferring money. Holders are also able to overcome foreign exchange swapping related issues when they travel across the globe.  Another benefit is that Stablecoins also enhance safety as no physical component is necessary to store Stablecoins. They can be kept in digital wallets and sent, swapped, or traded at the point of use.  One noticeable hurdle that Stablecoins definitely help overcome is conflicting regulations that are present across several countries. These conflicts then directly impact the businesses operating in those countries. To curb these uncertainties, Stablecoins become the crypt-asset of choice. Further, using Stablecoins can also thoroughly enhance efficiency in major crypto exchange platforms. 

    Why Proliferation?

    Proliferation, in most markets, is a direct result of demand surging.  This is also the truth with stablecoins. While USDC emerged as a dollar-pegged option, Tether and DAI also were dollar-denominated. As there was a widespread awareness of crypto and crypto-assets, many people saw the need to have Stablecoins to meet their needs. Stablecoins pegged to Euro, Dollar, Francs, Pounds, Yen, and are either in the works or are already available in the marketplace. Because a large chunk of the global economy is driven by these currencies, it becomes fashionable as well as efficient to have one or more Stablecoins so themed.  Talking from a national and governmental perspective, there had been speculations that the Chinese government is working behind the scenes to create a national cryptocurrency. If true, this would definitely be a Stablecoin pegged to the Chinese currency. Similar whispers have been heard about Russia, Japan, and other climes. While the Venezuelan experience of Petro was not pleasant, other reasons toppled its viability. And this was largely political.

    How does the future look?

    One accurate observation about Stablecoins is the scalability issues facing blockchains. At present, no Stablecoin boasts of a platform that is worthy of note. This no doubt limits the possibilities of a stablecoin. As of today, they exist just as digital currencies, but they can be a lot more useful. While continental blocs and countries have not yet proactively launched Stablecoins that commands global attention, this can be easily done. However, since monetary policies dog the present fiat-currency regime, not a lot of governments might want to let go that anytime soon.

    Concluding thoughts

    The emergence of fiat-pegged cryptocurrency has been refreshing and welcoming development. Although it is true that the pace of adoption is slower than it should have been, they have definitely earned a spot on the charts of global financial markets. A wide array of opportunities and fields exist in the next frontier as government, organizations, and power blocs explore more use cases of Stablecoins!

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