StableCoins – A Solution to the Prevalent Volatility of Cryptocurrencies

StableCoins – A Solution to the Prevalent Volatility of Cryptocurrencies

As decentralized virtual currencies on the Blockchain, cryptocurrencies wield immense potential in the field of finance. This is because cryptocurrencies do offer not only an alternative medium of payment and store of value but also an effective solution to some of the pertinent challenges associated with fiat currencies.

Some of these challenges include;
a) High transaction costs
b) Long transaction completion timelines
c) Inefficient cross-border payment processes
d) Direct control by central monetary authorities and involvement of third-party institutions
e) Susceptibility to inflationary pressures
f) Limited privacy of financial transaction data

Cryptocurrencies can solve these problems of conventional currencies mainly because they are decentralized. This is because they facilitate peer-to-peer transactions that do not require intermediaries’ involvement.

This reduces the costs and time required to complete transactions, increases transactional data privacy, and provides a hedge against inflation. However, one critical challenge associated with regular cryptocurrencies makes them less than ideal.

Volatility

According to the Binance Academy, volatility “describes how quickly and how much the price of an asset changes.” As such, volatility is simply a measure of the fluctuations that characterize the market prices of assets, including cryptocurrencies.

With that said, volatility is one of the biggest problems that users of cryptocurrencies have to contend with in the current crypto ecosystem. This is because volatility increases the risks of owning and investing in crypto and undermines its utility. But why is crypto so volatile?

Like with all other goods and services, the fluctuations in the value of cryptocurrencies come down to how the supply and demand of the asset behave. The value of cryptocurrencies is not pegged to real-life assets because they are purely virtual currencies.

Therefore, whenever events unsettle investors occur, the market value of cryptocurrencies shifts. For instance, if the government refuses to acknowledge a cryptocurrency as a medium of exchange, the price of that cryptocurrency is likely to drop.

On the other hand, if a government accepts crypto as a valid form of payment, the price appreciates. This makes cryptocurrency markets very speculative. And while this speculation allows investors to earn very high returns from crypto, it also introduces a lot of volatility to the crypto market.

This volatility makes cryptocurrencies very unreliable when it comes to being used as a medium of payment. However, developments in the crypto space have created a solution that mitigates this challenge.

StablecCoins – The Antidote to Volatility

According to Coinbase, a stablecoin is a “digital currency pegged to a ‘stable’ reserve asset like the US dollar or gold.” As such, stablecoins are much like other cryptocurrencies with the only difference being that they are backed by a real world asset.
The result of this convergence of digital currencies and regular currencies is an enhanced currency which has the benefits of both types of currencies. On the one hand, stablecoins offer users the stability that conventional cryptocurrencies lack while allowing them to enjoy the superior capabilities of crypto over fiat currencies.

How Do StableCoins Work?

There are three main types of stablecoins, namely;
 Fiat-collateralized stablecoins
 Crypto-collateralized stablecoins
 Algorithmic stablecoins

Fiat-collateralized stablecoins work by keeping a reserve of fiat currency that matches the value of the coins in the custody of an independent custodian. These stablecoins are also independently audited to ensure that they are indeed at par with the fiat currency to which they are denominated.

Crypto-collateralized stablecoins are much like fiat-collateralized stablecoins. However, the difference is that crypto is volatile, unlike fiat currency. As such, the number of crypto assets used to back up such stablecoins usually exceeds the value of those stablecoins to insure against drastic drops in value.

Lastly, algorithmic stablecoins do not necessarily rely on being dominated by a fiat currency or backed by a crypto asset. Instead, their stability is achieved through regulating their supply algorithmically using computers.

The Benefits of StableCoins

Below is a comprehensive breakdown of the benefits that come with the use of stablecoins over regular cryptocurrencies and fiat currencies;

a) Enhanced stability

While the value of fiat currencies fluctuate in relation to each other, they are mostly stable due to the fact that they are backed with assets like gold reserves. In the same way, stablecoins are backed by traditional reserve assets in fiat form.
For that reason, the value of stablecoins does not fluctuate frequently and uncontrollably the way unregulated crypto assets. This offers crypto investors a prime opportunity to fully exploit the potential of cryptocurrencies.
Long-term plans like storing value in crypto form can be made without the fear of losing money. Additionally, this enhanced stability has the potential to fast-track extensive adoption of crypto due to the fact that their value is predictable and regulated. Hence, they can be used in every day transactions.

b) A reliable alternative to fiat currencies

Once issues of scalability and environmental sustainability are sorted out, various crypto protagonists argue that cryptocurrencies will be able to effectively replace fiat currencies. However, stablecoins have the potential to provide an alternative even in the current dispensation.
This is because stablecoins are pegged to the value of real fiat currencies. As such, a stablecoin like USDC which is pegged to the dollar can be used to complete payments in the US. Additionally, stablecoins can also be used to pay for goods and services in areas where the local currencies are not stable.

c) Cheaper transaction costs

While the value of stablecoins is tied to fiat currencies, stablecoins do not adopt other qualities of fiat currency. For instance, stablecoins are decentralized assets that do not require the intervention of third parties like Central or commercial banks like fiat currencies.
As such, users of stablecoins do not have to incur any extra costs as transaction or service fees for payments facilitated by a third party. All they have to pay are the gas fees to validate the Blockchain transaction and that’s all.

d) Faster cross border payments

The world’s economies are more integrated today than ever before. As such, there exists an intricate web of bilateral and multilateral trade interdependencies between countries that necessitate systems for making payments internationally.

In such cases, stablecoins come in handy as they retain the decentralized, peer-to-peer system of conventional cryptocurrencies. They facilitate fast transfer of payments across borders by obliterating the need for payment companies which would only make the process longer and costlier.

Improvements to be Made in the StableCoins Ecosystem

And while a lot of opportunity lies in the adoption of stablecoins, several concerns make the experience of end users fairly challenging. For instance, there is a lot of uncertainty around the regulatory status of stablecoins.
This is because cryptocurrencies largely remain unregulated due to the fact that they are entirely decentralized and based on the Blockchain. However, stablecoins are pegged to fiat currencies and fiat currencies are regulated by governments.

This fact raises concerns if stablecoins are also supposed to be governed by statutory regulations. Additionally, end users are also concerned by just how extensively acceptable can stablecoins be in terms of facilitating payments for goods and services.

This is because there would be no need for more people to switch from cryptocurrencies to stablecoins only to encounter some scalability issues associated with regular crypto. Therefore, efforts must be made to fast-track the wide-scale adoption of stablecoins as a payment medium.

Lastly, security is a pertinent issue when it comes to all Blockchain applications. Due to the complexity of the Blockchain and its associated technologies, end users are not very conversant with the security architecture of crypto assets, including stablecoins.

As a result, they may not be able to audit the effectiveness of that architecture in protecting their assets. Therefore, it is important for the security measures protecting stablecoins to be optimized to prevent theft by unscrupulous hackers.

The Relevance of StableCoins in the Corporate Context

While there may be some challenges along the way, there is no denying that humanity is fast on track to adopting decentralized payment methods. This is in a bid to reduce costs, save time, and increase overall efficiency.

Therefore, it is important for all forward-looking businesses seeking to gain a competitive edge over their rivals to be at the forefront of integrating cryptocurrencies and in this particular case, stablecoins, into their financial systems.

This is because stablecoins have the capability to expedite payment processes and allow for better business outcomes through the use of the crypto ecosystem. However, there is one prerequisite for such advancement to be made.

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