How Stablecoin is trying to eliminate crypto problems?
One thing that makes cryptocurrency investments risky is the inherent volatility of the blockchain network. Prices may surge or plunge without apparent indicators, and investors may be caught in surprise that their digital assets are already losing value. Although there are certain factors that can be checked for the purpose of predicting the movement of the crypto market, sometimes users just can’t figure things out.
Despite the unpredictable nature, which is the very essence of digital trading, many crypto enthusiasts have succeeded in achieving their financial goals - some have even become millionaires. Without such risks and uncertainty, the financial gains could have never been meaningful for these people.
The risks may be perceived both ways - either as a challenge to overcome or as a hindrance to not pursuing great financial opportunities. Over the years, the number of investors joining the crypto craze has constantly been increasing, showing that crypto investments are seen in a positive light.
New developments have been implemented since bitcoin, the most popular crypto today, was introduced in 2009. One of them is the creation of stablecoins that experts believe can address certain crypto problems, including its volatile nature.
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Thousands of cryptocurrencies are now circulating in the industry worldwide. All of them share the same quality - volatility. This is an inherent nature of blockchain networks and digital trading. But in 2014, a newer breed of coins, called stablecoin, was introduced to eliminate the problem and boost the confidence of crypto investors. Since then, stablecoin has continued to gain popularity among different people and institutions and now has many variations, such as USD Coin, Paxos Standard, and Binance USD, among others.
The solution that this new cryptocurrency is trying to bring into the world of digital assets is stability. This is a critical aspect of any investment in the financial industry. Hence, if stablecoins become widely accepted, they can be effective as a store of value and medium of exchange. They may also be used like fiat currencies but retain the qualities of a cryptocurrency.
Most of the cryptocurrencies today are not stable. Whether investors are aware of this or not, it is the reality. For instance, bitcoin has experienced unstable price changes through the years and even today. Traders just can’t exactly predict when is the best time to trade their assets. But it’s the name of the game, so most of them have become used to it.
However, with a stable currency, such unpredictable swings may be eliminated. Some people believe that stablecoins may function like speculative trading instruments or derivatives that could attract various crypto speculators but may nevertheless be impractical for mainstream use. This notion has put popular cryptos in question, and matters pertaining to their characteristics as a store of value and medium of exchange have drawn interest among various industry players.
The stability that stablecoins could provide is encouraging among many investors. However, before they can be used as a store of value or a medium of exchange, their crypto coin model has to retain its purchasing power and also allow minimal inflation - that is simply to encourage reasonable spending, rather than just storing the coins.
If such an ideal function is attained, it is safe to say that stablecoins are a good investment. The fact that they are not controlled by a central authority shows their viability to achieve the goal. By then, they can offer security, anonymity, and decentralised features of a cryptocurrency, and as well as the low volatility of a fiat currency.
Notably, the increasing adoption of stablecoins can make cryptocurrencies even more popular as a mainstream medium of daily transactions and other applications. Such transactions may include trading goods and services over blockchain networks, derivative contracts, decentralised insurance solutions, consumer loans, and prediction markets.
Stablecoins are categorised into three types, as briefly explained below. Understanding each type can help in a more objective assessment of their potential for crypto investments.
- Crypto-collateralised stablecoin - it is characterised by underlying collateral with another cryptocurrency instead of a tangible commodity or a fiat currency.
- Fiat-collateralised stablecoin - this has a specific amount of a standard fiat currency as collateral to issue crypto coins. Gold, silver, and other commodities can also be used as collateral.
- Non-collateralised stablecoin - unlike other types, it is not backed by any collateral but retains a stable value through smart contracts on a decentralised platform running in an autonomous manner.
Stablecoins have a strong potential to improve the quality and use of cryptocurrencies. They can benefit investors with decentralised, anonymous, and global payment mechanisms, and as well as steady valuations like a stable fiat currency. However, as they seek to stabilise blockchain networks, outcomes and levels of success may vary depending on several factors at play.