A stablecoin is a type of cryptocurrency coded to maintain a consistent value by connecting its price to a stable asset, such as fiat, gold, or another currency. Unlike other cryptocurrencies, which are known for their price volatility, stablecoins aim to reduce price fluctuations by offering a steady medium of exchange for blockchain transactions and bridging the gap between traditional and digital finance.
Two Types of Stablecoins
Reserved-backed stablecoins are the most common type of stablecoin, as they have a reserve of real-world assets like fiat and gold as their backbone. On the other hand, an algorithmic stablecoin uses smart contracts to automatically adjust the supply of tokens in response to market demand, aiming to maintain desired prices without direct reserve backing, which is less common and unreliable.
Terra Luna
The Terra Luna is a blockchain protocol that uses fiat-pegged stablecoins to fuel price-stable international payment gateways. Regrettably, this experiment was a failure. It was de-pegged when an abrupt collapse resulted due to a small sample of unscrupulous investors engaging in risky tactics to yield high returns.
Key Features + Uses
Stability–the primary goal is to combat the high volatility that comes with emerging crypto markets. Moreover, it serves as an efficient medium of exchange due to its inherent solidity, making stablecoins a viable option for everyday transactions of goods and services. Lastly, it’s convenient to transfer funds from fiat to crypto and vice versa, allowing investors to easily enter and exit traditional and nontraditional markets.
On-Chain Functionality
On-chain functionality is another key component. Stablecoins are designed to integrate with smart contracts, enabling automated and programmable financial activities directly on the blockchain.
Speed + Accessibility
Stablecoins settle faster than the previous system and are very cost-effective, which is why you witness quicker yields.
Financial Inclusion
Stablecoins are now accessible to virtually anyone with access to the internet via a smart device and/or computer. This type of accessibility may offer the United States global dominance despite its massive government spending, increasing inflation, as well as a looming recession. Further, additional notable features include transparency and its ability to be liquid.
Stablecoin Risks
Possible risks adversely affecting stablecoins should not be ignored, especially with smaller stablecoins. One, there is the possibility of de-pegging. It is always possible that coins lose their backings, which can de-peg the coin. Smart contracts can be vulnerable to bugs and/or hacks due to poor coding. Two, there is a centralized risk. The core difference between a stablecoin and a central bank digital currency (CBDC) is –a stablecoin is issued by a private company, while CBDCs are issued by a government or central banks.
In short, stablecoins seem to possess many benefits for unbanked global citizens and provide the world with another technology to better transact.
Article: Chris Gates
Editor: Vaughn Lowery
