The fundamental reason why the first ever cryptocurrency Bitcoin was created originally and is widely prevailing until now is because they eliminate the need for middlemen reducing the transaction costs and time, and bringing in more accessibility, efficiency, rapidity, and several other benefits to the users. When Bitcoin initially came to light, it was seen as a pure peer to peer version of currency that facilitates smooth payments all around the world.
But as the saying goes, everything has two sides. Good while it lasted, Bitcoin certainly filled the required spaces for a while, but then came in the major challenge of price volatility. This challenge is what slightly weakened the adaptability and dependability of Bitcoins, especially as a medium of exchange, and evoked the emergence of other cryptocurrencies. And that is how a stablecoin came into existence, and today, they have become one of the most prominent breakthroughs in the crypto space as a dependable currency. Now, what is a stablecoin? Let’s take a look.
Understanding Stablecoin, a Price-Stable Cryptocurrency!
Stablecoins were created to be used the way any other cryptocurrency is intended to be used, i.e as a simple, scalable and secure means of payment. But what is distinct about stablecoin, as the name itself implies, is that they are “stable.” Stablecoin is a price-stable cryptocurrency which means the market price of a stablecoin is pegged to the value of another stable real world asset, such as the US dollar, etc.
Any investor or business would definitely not want to be put in jeopardy of unnecessary risks. And that is why, even though cryptocurrencies, mainly Bitcoins are tremendously popular, some investors and businesses are still uncertain about being associated with them. With Bitcoin’s price fluctuating every day, a price-stable cryptocurrency became the need of the hour for people to escape the local banking system, collapsing economy, and conduct business in a secure, seamless manner. Hence, stablecoins started gaining momentum and is considered as the holy grail, a long-held aspiration for the cryptosphere.
If you are intrigued by stablecoins, before we get into the development, let’s first understand what is meant by price-stable and how is an asset considered price-stable.
How Is a Stablecoin, ‘Stable’?
Stablecoins are almost as similar as US Dollars of the 20th century but in a digital form. At that point in time, the standard of gold was intact by which every dollar was pegged to a fixed amount of gold to ensure its price stability. A stablecoin works the same way. How they remain ’stable’ is that they are pegged to a more stable real-world asset such as fiat currency, real estate, precious metals, etc., in order to avoid price volatility.
To simply put, an ideal stablecoin possesses attributes such as the ability to sustain through high market volatility, should be cost-efficient to maintain, have easy to analyze stability parameters, and should provide greater transparency to the users. Such attributes are what make a stablecoin more ‘stable’ than other currencies.
There are different kinds of stablecoins revolving around the crypto space. Here’s a quick glance over them.
Types of Stablecoins
- Collateralized stablecoins
Collateralized stablecoins are those whose values are pegged to, or backed by another collateral. These types of stablecoins are further classified into the following,
- Fiat-backed stablecoins
Fiat-backed stablecoins are the ones whose values are pegged to fiat currency. One of the first and the most popular fiat-backed stablecoin is Tether( USDT). Tether brought in the concept of a cryptocurrency being pegged to the value of a US Dollar backed by reserves representing the total market capitalization.
- Asset-backed stablecoins
Asset-backed stablecoins are pegged to the value of an underlying real-world asset. They are basically underpinned by various types of assets except for fiat money or cryptocurrency. One fine example would be Digix, whose value is pegged to, or backed by the price of gold.
- Crypto-backed stablecoins
These types of stablecoins are backed by cryptocurrencies, but to ensure that the value doesn’t change with the price of the backed token, certain protocols are used here. For instance, the DAI token is backed by Ether and is pegged to the value of US dollars. DAI holds its price through the Maker Smart Contract, which creates and destroys MKR tokens in response to the price fluctuations of ETH.
- Non-collateralized stablecoins
Non-collateralized stablecoins, otherwise known as algorithmic stablecoins, are those that are not backed by or collateral to anything. This might seem contradictory to the concept of stablecoins we have been discussing all along, but to throw light on,
The US dollar used to be backed by the price of gold, but that ended decades ago. Nevertheless, they are still completely stable because people believe in their value. The same idea applies to non-collateralized stablecoins. These types of stablecoins use an algorithmic approach to control the supply of stablecoins. They are the most independent, decentralized form of stablecoins and do not involve any central authority.
- Hybrid stablecoins
Hybrid stablecoins combine the best of the both above mentioned types of stablecoins. They are pegged to an asset but are also modeled algorithmically.
Why Create Stablecoins? What Are the Core Benefits Involved?
- Enhanced store of value
Stablecoins provide a store of value that is much better than Bitcoin or any other cryptocurrency. Unlike any other cryptocurrency, stablecoins are not subject to wild inflations or speculative markets.
- Speedy Transactions
As stablecoins are backed by blockchain that work independently from a central institution, it enables transactions at any hour of the day. And stablecoins work based on a properly streamlined smart contract escrow system which makes transactions, settlements and various financial processes speedy, secure and efficient.
- Reduced Fees
Stablecoins eliminate the hurdles of higher-cost transactions involved with traditional payment methods, mainly credit card purchases, etc., and facilitates low-cost transactions benefitting both the customers and the business.
Stablecoins offer complete transparency to the users into the transaction process and they are backed through regular audits. Also, as they are underpinned by blockchain, anyone with an internet connection associated with the network can view the transaction information through blockchain explorer.
As stablecoins are basically computed with codes, they are highly programmable, that is any new feature can be added into them according to the changing market trends. For example, loyalty programs can be integrated into stablecoins, which boosts convenient user experience.
The most important benefit is of course the stability. Stablecoins do not get affected by the crypto price volatility as they are backed by a real-world asset.
Is Stablecoin the Next Big Thing?
Experts around the cryptosphere believe that stablecoins will serve as an irreplaceable part of the future of the crypto industry. The past few years have paved a clear pathway for the development of stablecoins. The demand for a medium of exchange with a more stable price gives birth to fiat-collateralized stablecoins.
However, there are still a few concerns such as strict regulations, transparency, centralization, etc going around stablecoins. But many institutions are striving towards making it better with their stablecoin launch with the advancing trends.
With improving liquidity, regulatory compliance, and transparency, we could see a better version of stablecoins launching in the market by the day, and if it continues, stablecoins have all the potential to become the most preferred and profitable cryptocurrency in the future.
How to Create and Launch Your Own Stablecoin?
As the approach to creating and launching stablecoins is relatively technical and demands a certain amount of expertise, especially, when you are working with algorithmic approaches, the ideal choice to make here is to hire a stablecoin development company. By doing so, the entire development to deployment process will come in handy, saving ample time, money, and resources, and you can work closely with them to create and launch the coin as you desire!
To get to know more about stablecoins, development process, pricing, or anything else you need, connect with our seasoned experts from Blockchain App Factory.