Why do we need stablecoins?
There has been an endless discussion on the utility and potential of cryptocurrency for quite a while now, with a lot of exciting crypto trends shaping up for 2021. Aimed at being the absolute pinnacle of utopian transfer of currency, we have seen exponential growth in the amount of research that has gone towards exploring the practical applications of cryptocurrency. This system, albeit near perfection, is still subjected to heavy scepticism and criticism.
The crux of the problem is the stability and reliability of cryptocurrency by an average everyday individual. To cite an example at hand, we can look at Bitcoin and its extreme volatility. Between mid November and mid December of 2017, Bitcoin price shot from $5,940 to as high as $19,190. These stark fluctuations lead to serious questions about the practicality and viability of cryptocurrencies as reliable modes of transaction.
To address this very problem, stablecoins were introduced. Tether (USTD), True USD (TUSD) Paxos Standard (PAX) are examples of currently existing and popular versions of stablecoins.
Now, it is imperative to understand what these stablecoins provide; to eliminate the scepticism that is thrown at cryptocurrency. If I were to tell you to invest in Bitcoin at this very moment, you would be rather hesitant because there is no real guarantee of a profit because of how unstable the cryptocurrency is (although, long term, I’m confident it’s the best investment ever!). For a beginner though, this would essentially make it more of a gamble and less of an investment. That’s not the future I, or many others want, for crypto. We want crypto adoption on the levels of the stock market.
But, when paired with collateral such as a US Dollar, the idea of investing in bitcoin becomes a lot more viable and comprehensible. This is because you now have a way out in case you ever decide to back out of your investment and would want to try it at a later point in time. This creation of collateral is what stablecoins do.
On top of that, they also provide a stable value to their respective coins which do not rise or decrease in value, unlike raw cryptocurrency.
To reduce this volatility that the usual cryptocurrency has, stablecoins are established to some stable asset or assets. Stablecoins can be ‘pegged’ to another cryptocurrency, fiat money, or materialistic commodities such as precious ores, metals, etc. This essentially means you get the benefits of both, a convenient mode of currency, as well as the perks of a decentralized market which in-turn eliminates the need for a middleman or a bank.
Stablecoins have primarily taken off due to their attractiveness as modes of payment. Their low cost, almost instant transaction speeds, as well as heavy security due to the presence of the blockchain model, are some of the perks of stablecoins. Another noteworthy point is its efficiency when it comes to cross-border payments. Usually, cross-border transactions must pass through multiple checkpoints which delay the speed of payment substantially.
This problem is easily mitigated using stablecoins because of the previously mentioned blockchain model. An entirely new avenue that has been explored by this form of currency exchange is the fact that stablecoins are programmable.
Essentially, they’re bits and pieces of code which function in cohesion. This implies that they can be programmed and features can be added to them as per the need of the user.
If we gaze at the current uses of stablecoins, they’re heavily skewed towards being used for cryptocurrency trading as I mentioned in the example above. They can also be used for making payments, remittance, money lending, settling settlements and lastly, as an alternative for banks. Out of the uses mentioned above, remittance plays a key role because cross border payments and sending money back home from overseas is a prevailing problem in these trying times.
The introduction of Ripple’s xRapid (XRP) has been regarded as the solution for the remittance problem. For the foreseeable future, the inculcation of stablecoins into the mainstream market would be a challenge, but if we put the pros and cons on a scale, the advantages of stablecoins easily outweigh the minor setbacks we might face in improving the technology to harness cryptocurrency to the fullest.
I would like to think of this as a stepping stone towards a future that is going to be heavily relying on stablecoins. The introduction of stablecoins at a larger, much grander scale is the first step towards eliminating monopoly, centralization and instilling transparency and faith.