One of the biggest reasons that in the Bitcoin, the harbinger of all cryptocurrencies, was incepted was to eliminate the role played by and the cost of mediators in eCommerce. Bitcoin was looked at as a purely peer-to-peer version of electronic cash that would allow a smooth flow of online payments from one party to another without the intervention of any financial institution that might take a cut from the transaction amount.
The Bitcoin was able to adequately fill the space for quite some time. However, the volatility of the Bitcoin has weakened its magnitude of dependability when it comes to using it as a standard medium of exchange. It is hard to imagine a currency that might be worth a Lamborghini on day 1, 10 grams of gold on day 2 and a McDonald’s burger on day 3.
These limitations have led to the development of another breakthrough in the world of cryptocurrency, aptly named as the Stablecoin.
Stablecoins, according to multipoint capital, are the largest Technology Acceptance Model (TAM) when it comes to dependable cryptocurrencies. The vision of the Stablecoin is much larger than the Bitcoin. It is a currency that will have a stabilized price which could stand as a challenge to the legitimacy of weak governments around the world.
Since the crypto world is quite innocent, the investors have arrived at the confluence that demands the need for a Stablecoin first and foremost.
Different kinds of Stablecoins:
A Stablecoin is a type of cryptocurrency that does not exhibit any volatility in its value and maintains a fixed value proportional to an underlying asset or a basket. The primary task of the Stablecoin is to arrive at a fine point that preserves the benefits of distributed currency like Bitcoin while bringing in the advantages of constant value which extends its utility to becoming a reliable medium of commercial exchange.
There are different kinds of Stablecoins.
- Asset-backed Stablecoins
- Algorithmic Stablecoins
Asset-backed Stablecoins derive their value from the value of an asset. This gives the value of the currency, a much-needed touch of legitimacy. one of the finest examples of an asset-backed Stablecoin is Tether. Boasting of a staggering 2.2 billion dollar market-capital, Tether Is built on the top of the Bitcoin blockchain, and each USDT corresponds to a 1:1 reserve ratio. There might be instances of Tether being shrouded in scandals because of unknown bank accounts and fraudulence reserve accounting. It has given rise to a lot of alternatives but Tether still continues to remain as the benchmark for the potential and functionalities of an asset-backed Stablecoin.
Asset-backed Stablecoin might look interesting on the surface, but it violates the basic principle of cryptocurrencies – decentralization. This has led a lot of crypto evangelists to believe that the long-term solution of a Stablecoin must not be centred around an asset but an algorithm that derives value from the equation of demand and supply.
The algorithmic solution presents a lot of other advantages as well. The big can spend many currencies send a subset of economics solutions can include parallel classes of Bond and equity shareholders. These classes can help provide the much-needed buoyancy in case of the S tablecoin value plummeting.
Just like asset-backed Stablecoins have Tether, algorithmic Stablecoin has one example that stands out from the rest – Basis.
The Basis was in the limelight for raising $133 million from Bain Capital Ventures, GV and Polychain Capital. While they are facing challenges from the regulatory bodies of the United States, they are considered to be the pioneer in the algorithmic Stablecoin space.
The Basis has multiple entities like the Basis token which are Stablecoins pegged to the US dollar, the bond tokens that represents one Basis token if the price of the Basis drops below the peg, and the share tokens that function like crypto assets that derive their value from market forces.
Stablecoins – the future of crypto coins?
The focus of cryptocurrencies has always been to create a less volatile more liquid and decentralized digital asset. The Stablecoin can be considered to be the Holy Grail that the crypto advocates were looking at.
The Stablecoin can be expected to facilitate transactions without friction, not only between two parties transacting using cryptocurrencies but also between parties that might need to shuttle between crypto and Fiat.
Additionally, Stablecoins can give the escape hatch for erratic economies like Zimbabwe under Mugabe’s rule. They can choose to move their money to a different economy or an asset without losing out on the value.
Cryptocurrencies haven’t found there fullest reach or recognition yet and Stablecoins can only be expected to make them better understood and more reliable.