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What are Stablecoins and Why are They Required?

What is a Stablecoin?

One of the most significant impediments to the widespread adoption of cryptocurrencies has always been the extreme volatility of the cryptocurrency market. Stablecoins are useful in situations like these. Stablecoins, also known as stable currencies, are a sort of cryptocurrency that aims to offer stability to the market, which is currently quite volatile.

It combines the advantages of a cryptocurrency with the price stability of existing fiat currencies to create a powerful new currency! This is accomplished by tracing the trajectory of a standard financial asset. While this asset is almost always a fiat currency, such as the dollar, there are others that track the rate of the euro, the Japanese yen, or even the British pound sterling.

A real estate portfolio, for example, can track the price of several more physical assets such as gold, oil, or even a stock portfolio. There are numerous stablecoins available, and we can divide them into three main groups:

  • Centralized stablecoins (off chain);
  • Stablecoins backed by other cryptocurrencies (on chain); decentralised stablecoins backed by other cryptocurrencies
  • Algorithmic decentralized stablecoins.

In theory, the value of a stablecoin should always be the same as the value of the asset that it is backed by. As a matter of principle, a stablecoin based on the price of the dollar should always be worth one dollar, regardless of how much Bitcoin is worth or how the market is performing as a whole.

What are Some of the Most well-known Stablecoins?

Many stablecoins have established themselves as essential components of the cryptocurrency ecosystem, taking prominent positions in the ranking of the most highly capitalized crypto-assets. Listed below are the most important ones as of April 2022!

  • Tether (USDT), the most well-known and widely utilised stablecoin, with a market capitalization of 82.5 billion dollars.
  • USD Coin (USDC): $51 billion.
  • Binance USD (BUSD), the stablecoin of the Binance platform, has a market cap. of $17.5 billion dollars.
  • TeraUdt (UST), a Terra blockchain-based decentralised stablecoin, with a market capitalization of $16.7 billion.
  • Dai (DAI): $9 billion;
  • TrueUSD (TUSD): $1.4 billion;
  • Neutrino USD (USDN): $1.1 billion;
  • Pax Dollar (USDP): $950 million.

USDT, USDC, and BUSD, all of which are centralised stablecoins, dominate the top of the chart by a wide margin. But the BUSD is being closely followed by the UST stablecoin on the Terra blockchain, which is a decentralised stablecoin that is on the verge of overtaking its centralised competitors in the near future.

Why were Stablecoins Created?

You are probably aware that in order to hold cryptocurrency, you first had to obtain Bitcoin or Ethereum via exchanges such as Coinbase. This necessitated the transfer of these assets to cryptocurrency exchanges such as Binance. It took a lot of effort to recover your gains (if any) because you had to convert those cryptocurrencies back to Bitcoin before you could ultimately get your fiat currency profits into your bank account.

In the same way, it would have been impossible to hold fiat on the exchanges in order to take advantage of a potential chance since it would have been essential to make transfers to sites that allow the conversion of fiat to crypto to be successful. This was extremely time-consuming due to the fact that it entailed multiple transactions and middlemen, as well as the fees connected with such acts.

This was the way things operated in the cryptocurrency market before the introduction of the first stablecoin, Tether, in 2014. As the market for stablecoins grew, more and more stablecoins were listed on exchanges, and as the demand for stablecoins increased, more and more stablecoin pairs were listed on exchanges. Since then, every exchange has at least one stablecoin that can be used in the same way that money (fiat) can be.

What Exactly can be Accomplished with a Stablecoin in a more Tangible Manner?

  • You can get away from the volatility of the bitcoin market
  • Take advantage of investment possibilities as soon as they present themselves
  • The ability to transfer assets anywhere in the world without losing value, as well as rapidly and affordably, all without the need for a bank account
  • Get access into the world of decentralized finance (De-Fi)
  • Stake your money to generate interest, as most DeFi platforms provide a better rate of return than banks

This has been demonstrated in particular by the transaction volume generated by stablecoins, which accounts for 80 percent of all spot trading transaction traffic. Tether, a stablecoin, is by far the most popular cryptocurrency on the market in terms of volume generation (USDT). This demonstrates the popularity and importance of this type of cryptocurrency in the cryptocurrency industry.

Centralized Stablecoins (Off chain)

Centralized Stablecoins have always been the industry standard, and it continues to be so as of the time of this writing. Consequently, they are stablecoins whose token values are guaranteed by off-chain assets, such as the issuing company’s cash reserves in dollars, bonds or commercial paper. Of other words, for every 1 token of a centralised stablecoin, the issuing corporation is expected to keep the identical amount in fiat currency.

Because the bulk of stablecoins are pegged to the value of the dollar, the most of the discussion will be centered on dollars. In order to ensure the stability and value of these stablecoins, they are pegged to the dollar at a rate of one token for one dollar, with the tokens representing debts and the dollars representing assets. The minting and buying back of centralised stablecoins is how the circulation supply of these coins is maintained.

In order to establish a new token, the dollar equivalent is hypothetically deposited in a bank to ensure that the token’s value is guaranteed. Alternatively, when a person receives the equivalent in dollars from their bank account, a burn of the token is carried out! Those fiat currencies are then utilised by the corporation that is behind the centralised stablecoin to produce interest, cover the costs of operating the stablecoin, and profit from the stablecoin itself.