The extremely high volatility of cryptocurrencies provides a lot of opportunities for traders and investors to make money. But the same property greatly complicates the possibility of using digital money for everyday payments. Due to the instability of the exchange rate, paying with cryptocurrencies can be unprofitable. Actually, even this is quite enough to think about the need for the existence of a coin that functioned on the blockchain, but would not be volatile. Eventually, stablecoins were born.
What are stablecoins
Stablecoins are a special class of digital coins. Unlike classical cryptocurrencies, they are stable because their value is provided by other assets. The spectrum of reserve assets is quite rich: fiat currencies, banking metals, commodities and other traditional assets. There are also stablecoins backed by other cryptocurrencies.
Tether (USDT) was the first stablecoin in history. It is the most famous and largest stablecoin, which consistently occupies a high position in the TOP-10 cryptocurrencies. In addition to USDT, there are also tokenized versions of the British pound and euro from Tether on the market.
In addition, there are other digital coins backed or pegged to the dollar, such as USD Coin (USDC), TrueUSD (TUSD), Binance USD (BUSD). All these coins are centralized, that is, under the control of issuing companies. Since they have the same collateral asset, the BUSD to USDT exchange rate is also close to a 1:1 ratio.
The popularity of dollar stablecoins is due to several reasons:
- The dollar is a global reserve currency that is widely used throughout the world for international transactions and trade. Therefore, many cryptocurrency users use dollar-linked stablecoins to avoid fluctuations in the price of cryptocurrencies.
- Pegging to the dollar ensures exchange rate stability. The stability of the coins makes it possible to maintain the value of assets when transferring between trading platforms.
- The use of stablecoins greatly simplifies and speeds up the process of exchanging cryptocurrency for fiat currency. Dollar-linked stablecoins can be easily exchanged for national currencies or transferred to bank accounts.
- Cryptocurrency exchanges and payment systems are developing their own stablecoins to provide users with a convenient and secure way to store cryptocurrencies.
- Stablecoins are universal, almost to the same extent as the dollar. If you have a coin that is traded in the Binance system, you can sell it for BUSD at any time, and then exchange BUSD to TRX. Intermediate transactions using stablecoins are the only possible way to exchange little-known coins for more investment-attractive assets.
Challenges and risks
In fact, stablecoins play an important role as a link between the crypto world and the traditional financial system, and their number continues to grow. However, the stability of new coins depends not only on the security asset, but also on the reliability of the project. Therefore, new stablecoins should be treated with caution.
The intermediate position of digital versions of traditional assets means that they are almost equally dependent on processes in the digital and real economy.
In addition to the risks typical of classical cryptocurrencies, tokenized assets are vulnerable to the same extent and for the same reasons as a reserve asset. Of course, this applies to fiat-backed coins to a somewhat lesser extent than to other tokenized assets. The presence of collateral increases the credibility of the coin, but also tightens the legal requirements for its operation.
To date, the prospects for the use of stablecoins are not entirely clear. They really simplify the use of digital assets and promote the integration of cryptocurrencies into the global economy. However, it is possible that over time they will be replaced by digital money, which will be controlled by the state.