Stablecoins are cryptocurrencies geared toward long-term price stability and are linked to the worth of a base asset, such as the US dollar. They try to prevent extreme volatility while yet providing all the advantages of cryptocurrencies.
The total market value of cryptocurrencies can fluctuate by billions of dollars per day. Even the most popular cryptocurrency, Bitcoin (BTC), is prone to severe price swings. Investors have observed a daily shift in the value of BTC of about 4% over the previous month.
Stablecoins use various strategies to maintain their price peg and are often tied to a currency or a commodity, such as gold.
The two most popular techniques are using an algorithmic formula to limit the number of coins produced, or keeping a pool of reserve assets on hand as security.
Also read, Altcoins: An Overview for Beginners
Stablecoins give investors the flexibility to invest in and withdraw from various cryptocurrencies while still remaining in the cryptocurrency space.
According to CEO of Modulus Global, Richard Gardner, stablecoins are used to eliminate the instability between fiat money and cryptocurrencies.
Additionally, stablecoins enable people in high inflation economies to save their assets in an asset linked to a more stable currency, such as the US dollar.
These currencies provide crypto-like advantages, such as quick transactions and minimal fees, without the disadvantage of volatility. As a result, investors can hold them without being concerned about wildly fluctuating portfolio values.
One use case is exemplified by international bank transfers. Normally, this would need many institutions and middlemen to convert foreign exchange (FX).
Also read, Crypto vs Tokens: Any Differences?
This process would therefore entail a number of phases, and different costs, and would typically take a few business days to complete, as opposed to a stablecoin transfer, which would be fast and have little to no fees.
Stablecoin issuers generate revenue by outrightly charging redemption and issuance fees is the primary way stablecoin issuers generate revenue.
Then, depending on the type of stablecoin, it frequently varies. The above-discussed argument regarding reserve transparency is a result of centralized issuers’ desire to profit from their transactions.
The fact that investors holding such stablecoins assume counterparty risk is seen by many as a disadvantage of the centralized scheme.
Counterparty risk is the possibility that the other party to the asset may fail to perform a portion of the agreement and breach the contract.
Decentralized stablecoins, on the other hand, have different revenue models depending on the protocol.
The sale of voting control tokens for the stablecoin’s future or the depositing of money into blockchain-based smart contracts to earn interest are common instances.
However, there is a risk of the bank running and not having enough liquid reserve in case of investor panic.
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