The pace that technology develops is so rapid that many industries are left with no choice but to catch up and even incorporate these new innovations into their respective fields. The financial industry, for instance, is an example of an area that has thrived on various technological innovations. We’ve seen the rise of digital wallets to the popularity surge of credit cards – all of which have allowed us to use financial services conveniently. Another one of these groundbreaking innovations is blockchain technology.
When one thinks of blockchain technology, one may conjure thoughts of terms like cryptocurrency, Bitcoin, or even decentralization. While all of these are, one way or another, tied to the concept of blockchain, it’s a lot more than that. In simpler terms, a blockchain is a shared, public ledger which records all forms of transactions. What makes it so unique is that these transactions are immutable, which can greatly reduce instances of fraud.
Cryptocurrencies have been all the talk in recent times thanks to the bull run and all the meme coins that came out of it. What others may not know is that cryptocurrencies make use of blockchain technology and cryptography to secure transactions involving this digital currency. Coins like Bitcoin and Ethereum are some examples of the more popular cryptocurrencies. However, there’s more to crypto than these two giants – we’ll find out more about it in the next section of this article.
What Are Stablecoins?
So how exactly are stablecoins and blockchain tied together? It’s simple. A stablecoin is a form of cryptocurrency that’s pegged to a more stable currency – hence, the name stablecoin. These coins can be easily exchanged for other cryptocurrencies when stored in your digital wallet. Alternatively, these coins provide stability especially in market environments with high volatility. Common examples of stablecoins include Tether, USD Coin, and DAI.
There are different types of stablecoins. First, we have fiat-collateralized stablecoins, which means that these stablecoins are backed one-to-one with another fiat currency, like the US Dollar. We also have crypto-collateralized stablecoins, in which the stablecoin is pegged to a specific cryptocurrency. Because the crypto landscape can be extremely volatile, these stablecoins are overly collateralized to ensure stability. Lastly, there are algorithmic stablecoins, which means that an algorithm controls the supply of the stablecoin, just like how banks do with traditional currencies.
Advantages of Stablecoins
Now that we’ve somehow demystified the concept of stablecoins, let’s dig in even deeper and talk about their advantages. Here are some of them:
Stability
The most obvious advantage of stablecoins is, well, their stability. Especially for new investors, allocating a portion of your portfolio to stablecoins is a smart idea to gain decent returns while navigating the volatile world of cryptocurrencies. The higher the allocation of stablecoins of your portfolio, the less risk. At the same time, you can capitalize on the best deals in the market, the red days, and invest in cryptocurrencies. So before you look into investing in cryptocurrencies, always consider allocating a part of your portfolio to these stable currencies.
Accessibility
More than one billion people in the world are still unbanked, with inaccessibility being one of the main causes. This case is true for many living in underdeveloped areas. With the popularity of online banks on the rise, however, this figure may change. As long as you’re connected to the internet, online banking is now possible.
Digital banks are slowly integrating stablecoins as they’re recognizing their value – which can be attributed to their low costs and efficiency. This can be especially useful for cross-border transactions which can often be quite costly due to the additional fees associated with them. While stablecoins may share that feature of stability with fiat currencies, a user with stablecoins can enjoy the benefits that they give, like low costs.
Challenges
While stablecoins have undoubtedly opened new doors of opportunities to traders and investors alike, that’s not to say that it doesn’t have its fair share of challenges. Like with anything new, the rules behind these stablecoins can be quite blurry – hence, the regulatory landscape can be difficult to navigate, especially for beginners.
While it’s easy to see the benefits they provide, many financial regulators see the risks associated with them, which includes money laundering and financial instability. However, the struggle in this situation is that regulators are attempting to strike a balance between safety and innovation – that way, many investors are protected. With the calls for a more stable regulatory framework, one that aligns with that of the traditional financial system, we can expect these issues to be resolved in the near future.
In Conclusion
We’ve successfully uncovered the mystery behind the popular technology of stablecoins. From their accessibility to stability, it’s easy to see why many crypto investors always have some stablecoins in their portfolio. That being said, there are also challenges associated with them, such as regulatory compliance. But with any innovation, a big question mark stil looms over its future. But with stablecoins now going mainstream, these issues might just be solved sooner rather than later.