Cryptocurrency evolution: The path to stablecoins
Apr 25, 2020
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Cryptocurrency rates are constantly growing and falling, changing dramatically, sometimes even during one day. Lack of reliability and trust are the main reasons that digital assets are not yet widespread. Stablecoins were designed to change this.
History of stable cryptocurrencies
Cryptocurrencies were created and designed to ensure fairness, transparency of transactions, and decentralization - to protect users from unfair regulation and interference from financial institutions, which makes financial transactions costly and burdensome.
What are the main problems with digital assets today? Representatives of modern business and consumers do not want to put themselves at risk when using cryptocurrencies and related transactions.
For example, you cannot pay someone a salary in Bitcoins (of course, in theory, you can, but in this case, it’s more a lottery than a clearly fixed payment), because the purchasing power will fluctuate along with the first cryptocurrency exchange rate.
Volatility also creates a serious issue for those markets that require price stability. In addition, it also makes it impossible to obtain blockchain loans, derivatives, and other long-term intellectual contracts that require price stability.
The battle to make the perfect money of the future is still ongoing. An ideal financial instrument should have several qualities at the same time: serve as a means of payment, a measure of value and a means of accumulation. This means that the market price of stablecoin must be related to another stable asset, such as the US dollar, oil, gold, etc.
Path to stability
In fact, the volatility of stablecoins is significantly lower than that of other cryptocurrencies - since their price directly depends on the rate of the real asset. This creates new opportunities in the development of the cryptocurrency and digital assets industry.
Moreover, such assets have a real chance to be used as a global currency, which cannot be influenced by the actions of the government or the banking system.
An ideal stablecoin should withstand significant market volatility, should not be extremely costly to support, have good scalability, maintain confidentiality and decentralization, and be transparent to trading and arbitrage transactions. It is such functions that can provide maximum adoption in the modern world.
Classification
The role of stablecoin in the market is almost the same as that of traditional fiat currencies. They can serve as a means of exchanging, calculating or storing capital. Moreover, their value is tied to traditional assets in a ratio of 1:1.
In general, stablecoins are divided into 3 types:
- Fiat binding (linked to fiat currency);
- Crypto maintenance (linked to crypto);
- Lack of maintenance (a stable coin is based on a mechanically generated algorithm that can change the supply volume if necessary to maintain the price of a stable coin tied to the asset).
The benefits of stable cryptocurrencies
1. Constant stability
The main and well-known advantage of stablecoins is stability. Fluctuations in the exchange rate of such coins are insignificant. For example, the rate of Tether (USDT) in recent years has fluctuated very slightly - only from 0.92 to 1.05 dollars. Random falls were associated with strong fluctuations in the cryptocurrency market as a whole.
2. Low volatility
The fluctuations of the stablecoin exchange rate are several orders of magnitude lower than that of other cryptocurrencies, since their price directly depends on the rate of the real asset. This turns them into a means of payment that can be used to make payments in daily life. In addition, their reliability is an additional incentive to spend them, and not to keep in the piggy bank.
3. New perspectives
For example, due to minimal price fluctuations, you can use a stable coin for credit and insurance services on the blockchain, which avoids the risk of sudden jumps in the speed of conventional cryptocurrencies. In addition, the user can be sure that the goods bought or sold by him/her for cryptocurrency will not radically change in price due to the volatility of the rate, which may well arise during operations with conventional cryptocurrency.
Are there any drawbacks to stablecoins?
There are not numerous, but still. First of all, these are:
1. Dependence on digital assets
In some cases, a stablecoin can be associated with other crypto assets. This can create serious problems due to the fact that all other digital assets can be unstable, and therefore unreliable for other purposes.
2. Third-party involvement
The truth is that the very essence of stablecoin does not correspond to the philosophy of cryptocurrency, which consists in complete anonymity and decentralization, since it depends on the traditional financial institutions of countries whose currencies are protected.
Well-functioning projects at the moment
At the moment, there are many projects aimed at creating the ideal stable coin. The most popular at present are Tether (USDT), which occupies the 4th place in the market capitalization with 4 billion US dollars, coin USD (USDC), TrueUSD (TUSD), standard Paxos token (PAX), Gemini dollar (GUSD), DAI MakerDao (DAI), STASIS EURS (EURS), Digix Gold (DGX) and others.
The next step of crypto evolution or an empty shell?
Despite the fact that many companies issue such coins, the ideal stablecoin has not yet been created. Improving existing stable coins is critical for the future of the crypto space as a whole, as well as for the upcoming adoption of digital assets worldwide.
Recent years in the history of the cryptocurrency market clearly indicate that the future of digital assets is difficult to predict. Numerous regulations issued by countries of the world have created a special trend that will determine the industry over the next years - the lowest volatility is the key to success in global adoption. Reception Stablecoin is growing steadily in various fields - money transfers, methods of payment for goods and services - this also applies to platforms that provide sports betting services. This segment of cryptocurrencies is only at the very beginning of the path, which can continue in different ways.
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The opinions and assessments expressed in the text are the views of the author of the article and may not represent the position of Cryptogeek. Do not forget that investing in cryptocurrencies and trading on the exchange is associated with risk. Before making decisions, be sure to do your own research on the market and the products you are interested in.
Blockchain specialist and crypto advisor. I love cooking, dancing and collecting books. Crypto investor since 2013. Earlier had a career in sales. Political views: Libertarian Right.
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