Stablecoins: Why are they so important?
The world’s most sought-after cryptocurrency, Bitcoin, has often experienced high levels of volatility, that is, the Bitcoin price keeps fluctuating. Between mid-November and mid-December of 2017, Bitcoin price shot from $5,940 to above $19,190, and then it fell to levels of $6,900 by early February 2018. Fluctuations of this magnitude are not features you’d find in a stable currency. The Bitcoin price fluctuation has led to serious questions about the viability of present-day popular cryptocurrencies as a reliable mode of transactions.
Enter a new class of cryptocurrencies, called stablecoins, which offers price stability and steady valuations. How do stablecoins work? An ideal cryptocoin should retain its purchasing power, plus have the minimum possible inflation, sufficient to encourage spending the coins instead of storing them. Stablecoins attempt to achieve this ideal behavior — with the most popular one being Tether.
Stablecoins have wide implications for innovative crypto trading platforms like ours — Giottus — in the near future. Here’s how they help.
Advantages of Stablecoins
Faster Speed: Stablecoins make various financial processes faster. Escrow is streamlined by smart contracts utilizing stablecoins. Banking and settlement with stablecoins allow transactions at all hours because the blockchain operates independently of a central organization with set hours.
Lower Fees: Credit card processing fees across large credit card companies such as Visa, MasterCard, and AmEx average about 2 percent per transaction. These high costs of a transaction can be circumvented through the use of stablecoins, providing value for both businesses and customers.
Borderless: The ability of cryptocurrencies to be anonymous, borderless stores of value has proven itself to be a real-world requirement for millions. Stablecoins provide a store of value way better than both Bitcoin and Bolivar, as stablecoins are not subject to wild fluctuations like Bitcoin price, or speculative markets.
Transparency: Transactions on the blockchain can be seen from a blockchain explorer by anyone with internet access. Also, stablecoins can offer full transparency into the process by which they are backed through regular credible audits.
Programmable: Stablecoins are fundamentally made up of code. Therefore, features can be added to them, adapting to changing needs. For example, loyalty programs can be built into branded stablecoins. By building loyalty plans on a company’s “branded” stablecoin, loyalty becomes directly integrated into the user experience. Stablecoin integration with loyalty programs makes for a convenient customer experience in a saturated loyalty marketplace where convenience is key.
Utility of Stablecoins
Safe Asset: Stablecoins have a value that is meant to be stable over any period, unlike Bitcoin price. This feature makes stablecoins an ideal asset because, unlike cryptocurrencies that can experience fluctuations dramatically in price every day, an individual using stablecoins to store value, sees no risk of loss, especially as they have full custody of their assets.
Payments: With Walmart unveiling a patent for its stablecoin, payments are going to be one of the primary uses in coming years. Tether is already amongst the most widely used cryptocurrencies in the world. Businesses profit from accepting stablecoins as payment because, in doing so, they dodge the 2–3% transaction fees that accompany the intermediary processing fees by financial institutes.
Remittance: Cross-border payments and remittances are very real problems that overseas workers face when trying to send money home. Sending money internationally comes with high fees. Blockchain solutions like Ripple’s xRapid (XRP) have been created, proving the ability of the blockchain in solving the remittance problem. However, stablecoins could lower the fees even further because of their inherent price stability, which would be difficult in case of fluctuations like that of Bitcoin price.
Lending: Stablecoin lending is currently one of the most high-yield opportunities for debt investors, giving double-digit interest rates. This demand is fueled by extensive institutional demand for stablecoin loans.
Settlement: When settlements are paid out, they are often unable to be delivered on time because they are subject to usual bank hours. However, stablecoins operate 24/7 because they run on the blockchain, instead of a centralized financial institution with business hours. Hence, parties receiving compensation from settlements can receive their money immediately through stablecoins.
Alternative Banking: One only needs internet access to have a stablecoin “bank account”. Users have full custody of their funds with stablecoins and do not face bank failures or limited bank hours. Underbanked businesses that cannot open a company bank account for some reason also benefit from stablecoins as a method of alternative banking.
The Future of Stablecoins
According to an article on Entrepreneur India, “stablecoins are hybrid cryptocurrencies because they are blockchain-based units that are also backed by fiat currencies or commodities, which is why they provide the benefits of both crypto and fiat currencies.” Therefore, stablecoins might turn out to be national digital currencies in several nations, because it’s easy to influence people to utilize a currency that is run by the government or some sort of central bank.
In addition to stablecoins being a hybrid of cryptocurrencies, the article mentions that “stablecoins enable merchants and consumers to rely on balanced prices that are not affected by the high volatility of the crypto market.” The high volatility is obvious if we look at Bitcoin price fluctuations. If the value of stablecoins is not or less affected by the rapid change in the crypto market, it’s very likely that stablecoins can be trusted to replace the money.
In general, stablecoins are revolutionary tools with enormous potential to fundamentally revolutionize the future of finance. With blockchain as its underlying technology, it can scale fast globally and disrupt the traditional payment systems. Stablecoins are already thought-provoking people’s understanding of money, generating a paradoxical environment where they will thrive as the main currency.