What are stablecoins?
One of the problems with cryptocurrencies is their volatility. As a digital asset that has no actual connection with the real world, cryptocurrencies have failed to gain the expected global recognition due to their volatility. The concept of stablecoin came into the picture to solve this issue and promote the mass adoption of cryptocurrency across the world.
Stablecoin refers to a cryptocurrency with a financial value that is “pegged” to another currency, such as the US Dollar. Stablecoins allow users to buy, sell, and trade blockchain assets that mimic the prices of government-issued currencies. Stablecoin is a type of cryptocurrency with a lesser-volatile price when compared to other assets such as gold, fiat currencies, and other commodities.
How does the stability work?
Stablecoins gain traction because they tend to provide stability, security, and a steady value chain.
The supply of Stablecoins is limited, and if the price starts to go up rather than the intended amount, the issuing authority dilutes the coin supply, and hence the price is decreased.
If the value of Stablecoins is less than what it is intended to be, the total coin supply is further liquidated since high liquidity increases the chance of a price rise, or the token supply will just be reduced.
Can You Make Money Off Of Stablecoins
1)Earn interest on stablecoins
In this case, you deposit the desired amount of stablecoins, to work with your stablecoins, and you get your money back plus the interest accrued over time which can be as high as 12% a year, at the end of the agreed period. This works well with fiat and commodity-collateralized stablecoins, and this allows you to enjoy passive income.
2)Lending stablecoins on your own
On a platform like Compound, you can borrow and lend cryptocurrency on a short-term basis, moving your assets around liquidity pools for offering the highest annual percentage yield (APY). Also, you can research all lending outlets present on the market, assess the risks, and handle the paperwork etc.
3)Staking stablecoins
For staking process, the network will pay you rewards if you lock your stablecoins to ensure the proper operation of the entire network they circulate on. Similar to making a bank deposit and this method suits those interested in the technological advancement of the cryptocurrency.
How stablecoins are supporting the growth of an ecosystem
1.Borderless payment
Being globally acceptable and useful is an advantage of cryptocurrency. Just like Bitcoin, stablecoins can also be traded over the Internet, regardless of country, bank or any type of intermediary agency.
2.Low Fee
Transaction processing fee has been costly for fiat and crypto. The conversion from fiat to crypto or vice versa has even higher charges. Stablecoin can help reduce these costs when the currency is converted to stablecoins to complete the transaction.
3. Faster Processing Speed
Processing financial and crypto transactions using stablecoins takes less time. Especially when traders need to convert fiat to crypto or vice versa, the time taken for the process is quite long. This can affect their investment as the prices change midway. By converting crypto to stablecoins, the process is simplified and also allows traders to complete the transaction before the price fluctuates again.
4. Transparency
As stablecoins are traded on the blockchain network, full transparency is possible.
5. Smart Contract
With a crypto-collateralized stablecoin you’ll be able to program smart contracts denominated in whatever fiat currency the stablecoin is pegged against, without the need of relying on external oracles and other mechanisms to determine the rate for each transaction/contract.
Conclusion
For decentralized apps, Stablecoins open a gateway of all kinds of possibilities, particularly those that need long-term lockups or escrow mechanisms. Prediction markets, saving accounts, decentralized insurance, decentralized exchange trading pairs, credit and debit markets and remittances are viable with the introduction of best Stablecoins. As there are definitely multiple approaches to creating decentralized Stablecoins, eventually the market will decide which one will stand a chance to be the winner in today’s blockchain world.