The first and foremost point we learn about the money is that it belongs to the government institutions. They print the money and we spend as the payments and use it as a store of value. This phenomenon was there for more than a decade or two, but things started moving resentfully when someone promulgated the whitepaper of the Bitcoin.
The millennials always hunting for the methods which are away from anyone’s controlled zone and when they start knowing about the Bitcoin and other cryptocurrencies, they simply jumped in that without knowing exactly what it is. After getting a deep bath in the small pond of cryptocurrencies, they knew about the factor that if the prices can go up and they can also fall too. The volatility in the cryptocurrencies makes them think twice to enter. Let me tell you a fact about human nature “after getting into the unrestricted zone, the first thing they do is to find a way so they’ll feel guarded if something unfavorable appears”.
Initial stages are always challenging. This argument we don’t take when it comes to any innovation. Cryptocurrencies are creating new forms of centralized and decentralized systems where we can be our bank and can transact globally with anonymity. If there are pros in crypto, there is always a scope for the cons. We know there is a tendency of dogmatizing every innovation that is not in the control zone of the lawmakers so they always try to find a way to shift the sight on the negative aspects and maintain every possible confusion which makes turmoil.
Take a small stone and throw into the pond and you’ll get to see the layers going forward for some moments and do the equivalent thing with the ocean, nothing will occur. The crypto situation is exactly like this but we are in the era of low patience and high return mindset. Crypto is pernicious because it has volatility and we bought that argument. So, to tackle the volatility thing (as it is only happening with the cryptocurrencies, dah!), stable coins appear into the panorama.
The condensed explanation of the stable coins is that the currency is backed by the real-world asset to tackle the volatility to keep the investors & traders safe.
We understand this is the description that anybody can say to you so we are digging more to give you a fundamental intelligence of the stable coins before touching on the aspect of how they rise in the last few years.
As we above mentioned, the stable coins are backed by real-world assets to keep them away from volatility and make them a secure place for investors and traders. Money often has three functions, store of value, medium of exchange and a unit of account. Cryptocurrencies may fulfill all these aspects but as it is freshly made pond, it will take time to turn it into the ocean so the stones can not make a difference to the upper layer. The volatility is there, so, in some ways, it is harming these three functionalities when we value them with real-world assets. Most of the cryptocurrencies are meant to be used as a medium of exchange, not just the store of the value. The obstacle is that due to their small market cap, even the biggest cryptocurrency, Bitcoin tend to wide inconsistencies with a price. Weighing with the USD, it has preserved its value for many years. But in the cryptocurrencies, today the price is worth X and tomorrow it is half of the value. The pizza story of the Bitcoin is still be lectured in so many crypto seminars but think about the man who paid millions for the pizza. The stable coins come in just to tackle the word volatile which is always one of the shadows of the cryptocurrencies and mostly decentralized cryptocurrencies. They’re frequently used as a medium of exchange for day to day purchases. They aren’t that popular right now. Presently, their main usage is on the crypto exchanges. If a trader wants to get out of the Bitcoin volatility, they simply transfer their funds to the stable coins (Tether and USDT, etc) and then to the Bitcoin.
This scheme is popular in the decentralized exchanges which don’t supply their users with the option to exchange Bitcoin or Ethers for fiat currencies. Making arbitraging more convenient and closes the price gap that the traders usually see between Bitcoin exchanges. It is more like utility coins for the traders than the medium of exchange.
There are many ways to peg stable coins. Creating trust is worth it. If the trust is not there, everyone will cash out and the value will collapse. In this case, the company pegged it with a kind of asset. The collateral is proof that it coins should be worth the pegged amount.
- USDT or Tether is backed by the actual USD.
- DGX is backed by Gold.
There might be various forms of collateral. The collateralization can be done by FIAT, ASSET (Gold, Oil), Crypto Token (BTC, ETH)
(Crypto collateralized stable coins are easy to audit as the company balance can be viewed on the Blockchain.)
There is also an algorithmic pegging of the stable coins. The company writes sets of rules, also known as smart contracts that increases and decreases the number of stable coins in distribution depending on the price. If people begin believing a new coin that is secured by the one USD and they start buying it, the price will increase and the algorithm begins producing new coins and manages the coin value and the opposite of this, the coins get removed from the overall supply. The smart contract works as collateral in this.
The rise of the stable coins doesn’t happen in a moment. This also took some time after the wave of decentralization happened in the financial markets. The exchanges are currently having this business model working inside their trading platforms. Some companies charge a fee and some use stable coins to raise awareness of the services they’re offering. Huobi and the Gemini are one of the examples. There are multiple stable coins in the market right now such as Tether – fiat collateralized, TrueUSD – fiat collateralized, GUSD – fiat collateralized, USDC – fiat collateralized, DAI – crypto collateralized.
In the practical sense, there are various drawbacks of the unpredictable cryptocurrencies. The idea of the stable cryptocurrency was in the air for a long time. Multiple national currencies have also tried the concept of pegging their currencies to other national currencies:
- Gold to USD in 1971
- Thai Baht to USD in 1997
- Chinese Yuan to USD in 2005
- Swiss Franc to Euro in 2015
The modern forms of money always depend on attractiveness. The new competitors like stablecoins are different in so many ways. The risk is there because there is no intervention of the government, like cryptocurrencies, but they have the capability of solving the biggest problem i.e. volatility.
Facebook recently launching Libra and JP Morgan launching JPM Coin has boosted this business model throughout the globe immensely. The stable coins are not only solving the volatility but low costs money transfers and speeds are also huge benefits. There is no doubt that the stable coins can be embedded into digital applications of the open architectures as opposed to the proprietary legacy systems of banks. The sudden growth of the cryptocurrencies has many reasons such as
- Volatility in the Crypto Market
- The rise in Non-Fiat Crypto Exchanges
- The successful Asset raise like Baisi which successfully raised $133M from top ventures.
The most substantial gravity point is the promise to make transacting as easy as sending social media messages. The stable coins are doing well in the market. But the time will change when the pond becomes the ocean and the stability these coins are contributing will be offered by the mainstream cryptocurrencies.
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