Introduction to crypto-currencies
Cryptocurrencies are in the news these days and are widely used all over the world. There are many cryptocurrencies available in the world like Bitcoin, Ethereum, Litecoin and many more. One of the most popular blockchain-based cryptocurrencies is Bitcoin. But, Bitcoin and other cryptocurrencies are highly fluctuating in value. In other words, we can say that they are volatile. For example, the price of Bitcoin approximately rose from $7500 to $30000 during 2020. That means that it increased more than 4 times from its value last year. Moreover, we can observe drastic changes in the value of Bitcoin on a daily basis. Assume that you paid $ 15 for pizza yesterday and the same amount would be worth $50 today because the value of that crypto token went up. This kind of short-term volatility makes Bitcoin and other popular cryptocurrencies unsuitable for daily use by the public and small investors cannot handle this kind of irregularity. Small investors and other users also require more stability in the market.
Basically, a currency should act as a medium of monetary exchange and a mode of storage of monetary value, and its value should remain relatively stable over longer time horizons. Users will avoid accepting it if they are not sure of its purchasing power tomorrow. By choice, a crypto coin should maintain its purchasing power and should have the lowest feasible inflation, sufficient enough to encourage spending of tokens instead of saving them. Stablecoins come up with a solution to achieve this ideal behavior. Therefore, Stablecoins came into light as a new technique to drive the new way of adoption of cryptocurrencies.
Now what is Stablecoin and how does it work? We will explain all this in detail in the next section.
What is a Stablecoin and how does it work?
Stablecoins are a type of cryptocurrency which were raised on the concept that minimizes volatility. Stablecoins can be pegged to stable assets such as the US Dollar, Gold, cryptocurrencies and other Fiat currency. In short, Stablecoin is a digital currency that always holds a stable price. These types of cryptocurrencies are developed to counter the unstable crypto-market scenario and make sure of stable ground for all the stakeholders. Due to this, Stablecoins are not considered for an investment aspect, but rather a safeguard towards the fundamental value of the pegged asset.
Stablecoins are globally used. They can be sent over the internet. These days, you will find many Stablecoins on the exchange. These coins are slowly securing popularity and reviving investor’s belief in digital currencies. They share the same capabilities as ETH, but their worth is fixed, more like a traditional currency. If you want to send or receive money, you need an Ethereum account. So, you have access to stable money that you can use on Ethereum.
You must be wondering why we require to create fiat-backed crypto tokens rather than just using fiat currency. Decentralized currencies do not need any centralized authority to bring faith in the system, thereby reducing additional costs. Additionally, cross-border payments can be made quickly with cryptocurrencies. Backing crypto tokens with stable fiat currency or assets can add more value and raise more trust among investors and users. Demand for Stablecoins is high, and Stablecoins are also secure by cryptography. No one can forge transactions on your behalf.
A Stablecoin has the primary advantage that it is safe and secure over other cryptocurrencies. Because other cryptocurrencies are unpredictable and tend to fluctuate, sometimes wildly. Other benefits of Stablecoin are that they are simple, stable, transparent, have lower fees, faster speed and are available all over the world.
Stablecoins vs. Bitcoins
We have discussed lots of things about the nature of Stablecoins. Now, it may be interesting to note the essential differences between Stablecoins and Bitcoins (another traditional cryptocurrency).
The Stablecoin is a new class of cryptocurrency that is rapidly changing over time. These coins, as digital currency, aiming to bridge the gap between the benefits of cryptocurrencies and the stable nature offered by fiat currencies.
The algorithms behind every cryptocurrency might seem a bit complex, but we can say that “Holding a stable value in any case” is the key for Stablecoins. The future of Stablecoin seems significantly bright for greater practical usage and wider adoption than other crypto assets to help move transactions and trades from traditional financial markets onto the blockchain. Thus, the development of Stablecoins has the future to drive crucial change in national economies and eventually on a global level.