What are Stablecoins?

Just when you thought that you understood the new world of cryptocurrencies, there's another concept to master stablecoins, the currency that closes the gap between cybercurrencies and traditional money. Stablecoins are a new type of asset that you can use to play games at a mobile jackpot casino, order goods and services online or invest safely. Stablecoins are backed by cash or another reserve asset so that users have the best of both worlds - the convenience and privacy of crypto transactions along with a traditional government-backed currency.

The first stablecoins, BitUSD and NuBits, were issued in 2014. They were collateralized through other cryptocurrencies as opposed to fiat assets. Neither of these stablecoins are major players in the stablecoin market at the present, though both still exist.

There are 4 different types of stablecoins:

Fait-collateralized - pegged against real-world currencies like the Euro or the US dollar.
Commodity-collaterized - stablecoins fixed against real-world commodities such as oil, gold, other precious metals
Crypto-collaterized -- where the value is backed by other cybercurrencies
Non-collaterized -- not supported by either real or digital asset collateral. Their value is dependent on a complex combination of smart contracts and algorithms to manipulate the supply and keep the price stable.

All stablecoins:

control the supply of their coins in circulation
are backed by some kind of security
keep their value fixed to their representative real-world asset

They differ from other cybercurrencies in that they:

are non-speculative in nature which allows them to reduce volatility so that they act as a "safe haven" asset
are built on permissioned blockchains which allowed them to be more centralized in nature. Blockchain creators exercise full control over selection of public data, allowed participants and node operators
backed by real-world assets. Independent auditors review assets frequently to allow the stablecoin to build trust.

Stablecoin Market

Today the stablecoin market is valued at approximately $113 billion. Stablecoins are used mainly by investors who prefer to avoid the volatility associated with cryptocurrencies such as Bitcoin, Ethereum, Dogecoin and dozens of others. Cryptos are famous for see-sawing widely in value on a day-to-day basis. To safeguard funds while benefitting from the advantages of a cybercurrency, the stablecoin was developed. According to U.S. Securities and Exchange Commission Chair Gary Gensler, in July 2021, the majority of trading on all crypto trading platforms took place between a stablecoin and some other cybertoken.

Stablecoins remain stable in value against a pegged external asset class. This minimizes price volatility. The value of the stable coin is fixed against that of traditional real-world assets such as a valuable real-life commodity (gold or other precious metals, a combination of currencies or a single fiat currency as traded on exchanges. It negates the speculative nature of cybercurrency trading to ensure a more reliable and consistent market environment.

There are multiple stable coins, the most prominent of which is pegged against the U.S. dollar, the world's global fiat currency, at a 1:1 ratio. Unfolding trade wars and global market instability is creating stablecoins that are pegged against other currencies including the Japanese Yen, the British pound and the Euro.

Demand

Stablecoins act as a stabilizing force in the sea of blockchain supply and demand. A 10,000 bitcoin transaction in 2010, which was then worth approximately $30, is not worth $98 million. Investors believe that the main benefit of the stablecoin is that it can mitigate speculative digital assets' huge swings in value.

Many big stablecoin users include multi-national corporations such as Wells Fargo and JP Morgan. These companies view stablecoins as a new solution that allows them to settle cross-border payments more efficiently, faster and cheaper than current fiat solutions. SWIFT, for instance, takes several days to clear and requires intermediary financial institutions, each of which subjects the parties to red tape and takes a sizeable cut.

For example, in 2018 Filipinos working overseas sent $32 billion back home through traditional banks. The banks collected a sizeable cut of those funds had the funds been sent via stablecoin, the process would have involved no third-person fees.

Benefits

Stablecoins are a protection tool for traders and investors. When markets become volatile, using stablecoins helps to protect you, especially if theres bad news or you see a parabolic short-term rise in your cryptocoins value and suspect that the cybercurrency may be taking a nosedive in the near future.

A stablecoin is especially useful for users that need a trustworthy and stable virtual currency that allows them to enter and exit volatile cryptocurrency market at their convenience. They gain a cost-effective too that doesn't demand that they convert their assets back to a fiat currency. Via stablecoin, users have the opportunity to increase cybercurrency holdings because the stablecoins can be sold and then bought at a moment's notice. It's a temporary safe haven asset that preserves the real-world value of an investment.

Caution

In an article on the International Monetary Fund's blog, The Rise of Stablecoins, stablecoins were described as a commodity that facilitate global payments through stable-valued virtual assets. They cautioned, however, that Stablecoins offer the potential for better integration into our digital lives and are designed by firms that thrive on user-centric design. Large technology firms with enormous global user bases offer a ready-made network over which new payment services can quickly spread.While many stablecoins continue to offer claims on the issuing institution or its underlying assets, and many also offer redemption guarantees at face value, government-backing is absent. Trust must be generated privately by backing coin issuance with safe and liquid assets.