Blockchain is a technology with the ability to disrupt several industries (we wrote about it in our 5 Fintech Trends of 2019). It has several uses, and the technology aims to create a secure, transparent, decentralized payments system. It’s most popular use is to create cryptocurrencies.
The problem with cryptocurrencies
We all have heard the stories about people who became millionaires by investing in bitcoin, and also the stories of it losing its value just a few weeks later.
This happens because cryptocurrencies’ value is centered around speculation, so they fluctuate on a daily basis, which makes them unreliable as a currency.
Stabecoins aims to help in this regard – having the benefits of cryptocurrencies – transparency, security, privacy, simplicity) but without the volatility that comes with it.
What are stablecoins
Just like other cryptocurrencies, stablecoins are digital money that aims to mimic traditional stable currencies.
How? Well, just like other currencies, stablecoins are collateralized to the value of an underlying asset (which can vary). In general, there are 4 types:
- Fiat-collateralized Stablecoins: These coins are backed by fiat currencies (like USD, EUR or GBP), which means that as long as that country’s economy stays stable, so is the currency.
- Commodity-collateralized stablecoins: These coins are backed by other commodities like gold and other precious metals, oil, and even real estate. They have the potential to value overtime and make investing in gold or real estate achievable for everyone.
- Crypto-collateralized stablecoins: These are stablecoins backed by other cryptocurrencies. They are very decentralized because everything runs on the blockchain and enjoy more liquidity. They have not gained much tractio mostly because of its complexity.
- Non-collateralized stablecoins: These coins use an algorithmically governed approach to control the stablecoin supply. This is the most decentralized and independent form of stablecoin, as it isn’t collateralized to any other asset. However, it requires continual growth to be successful.
(Read more about the different types of stablecoins here.)
How can stablecoins help in the real world
Although complex in its structure, stablecoins can be a reality and bring a lot of advantages to users.
They can be used as a day to day currency, enabling digital payments everywhere and reducing the risks of cash use.
It can streamline recurring payments and P2P payments, making it easier for employers to have employees working remotely from all over the world.
Stablecoins can also be useful in diminishing inequality and helping developing countries around the world – the money sent by migrant workers to their families can now reach them in a faster way, with much lower fees, and without the stress of volatility of current cryptocurrencies.
It can also protect citizens in case of a crash of the local currency and hyperinflation.
Where is the future going
With all its advantages, there are still some setbacks for stablecoins: fiat-backed stablecoins are managed by a single entity, which means there is a need for a regular transparent audit of its reserve, to guarantee that the entity is actually backing up their stablecoins with real fiat.
It’s also constrained by the same regulations as fiat-currency, which means conversion is less efficient, and it has less liquidity.
There’s also the chance that the asset backing the currency crashes (be it fiat or other cryptocurrencies).
Stablecoins are still in the beginnings of its development and it’s still far from a mature level. However, its stability and advantages are certainly the reasons it might help cryptocurrencies come to the mainstream.