Everything There Is To Know About Stablecoins
Cryptocurrencies’ popularity has soared in recent years, especially during the last bull cycle of Bitcoin. The main drawback, however, or the main advantage of cryptocurrencies is the price volatility. The crypto market is known for its dramatic and unexpected price swings that are often associated with a shift in the relationship between market demand and supply.
However, crypto’s volatility is precisely why numerous businesses have been reluctant to accept crypto payments, and it is also one of the greatest obstacles to mainstream adoption. That being said, cryptocurrencies offer several advantages, and the latest bull cycle attracted a new audience of businesses as well as individual and retail investors eager to reap their benefits.
Stablecoin arrived on the market which bridged the gap between cryptocurrencies and fiat currencies.
In this article, we will take a closer look at stablecoin and some popular stablecoins on the market.
Stablecoins – Definition
What are stablecoins? Stablecoins are designed as digital currencies that offer the flexibility of digital assets while maintaining a stable price over time. Their value is pegged to a reference asset like a commodity, cryptocurrency, or fiat currency such as the U.S. dollar. In other words, as the cryptocurrency is backed by a stable asset, a single unit of stablecoin is worth one dollar at all times.
This mechanism decreases the volatility of the stablecoin, and if there is a threat to its stability, certain actions bring it back to equilibrium. In contrast, the market capitalization of crypto can increase or decrease by millions of dollars in a single day. Even cryptocurrencies that are considered more stable compared to others on the market, such as Bitcoin and Ethereum, can experience significant fluctuations in their value.
For example, between 2021 and 2022, Bitcoin’s value dropped significantly to around $20,000. This is why there was a market demand for stablecoins that not only maintain the advantages of cryptocurrencies — safe and fast payments as well as short processing times and lower transaction fees — but also count on a mechanism in place specifically designed to maintain its stability.
To learn more, you can read this full guide to stablecoins, which covers their main use and importance.
Algorithmic stablecoins are a type of stablecoin that maintain their price point via algorithmic control of the supply. One example is TerraUSD, which was considered the biggest algorithmic stablecoin based on its market cap of more than $18.7 billion in May 2022. In this case, TerraUSD was paired with Luna, and its value was based on the mining (introduction) of new coins and burning (decrease of the supply) of Luna.
Binance Stable Coin
The BUSD stablecoin was developed by Paxos and Binance, who created a cryptocurrency backed by the U.S. dollar. It is fully regulated by the New York State Department of Financial Services, which means the users are protected. What’s more, users are able to buy and sell ETH for BUSD without any additional fees.
USD Coin is a stablecoin that was paired with the U.S. dollar. Its supply is managed by the Centre, an organization that includes members from online trading platforms Coinbase and Bitmain. As of August 2022, it has a great market cap of $54 billion which proves that the project is successful.
In conclusion, stablecoins are yet to experience mainstream adoption. However, they are gaining traction due to their main advantages. Essentially, they bring the best of two worlds. Not only do stablecoins offer better security and fast processing of crypto transactions due to their design as a digital cryptocurrency, but they are also paired with stable assets such as other cryptocurrencies or fiat currency. In turn, this maintains the stability of the coin and represents a good alternative that tackles the volatility problem.
The stable price range is something that we generally associate with fiat currencies, and this is one major reason why stablecoins are supported by different financial institutions.
Currently, as we can see, there are numerous businesses that accept crypto payments, and the same can be said for stablecoins. As the market expands and more stable coins emerge, we can expect to see a lot of popular brands on the market that supports the mainstream adoption of stablecoins.