From crypto-based stablecoins and international remittances to food distribution, sea transportation, and more, companies in these industries are facing challenges that go beyond the capabilities of traditional banking alone. Consequently, if you intend to trade or mine Bitcoin, you can visit the official bitcoin buyer website. In addition, the withdrawals on this platform are quick with extraordinary security.
The value of blockchain is being seen as an effective tool to revolutionize these processes since it has the potential to be 100% transparent. Also, stablecoins are seen as reasonable solutions for ensuring the integrity of these transactions and keeping the stability of cryptocurrency values. Those stablecoins are based on the underlying asset or currency, which gives them their value rather than having an arbitrary value on the market like most cryptocurrencies do today. Recently, there have been many attempts to create different stablecoins that give value based on underlying assets like gold, oil, etc.
But those are not blockchain-based stablecoins since the value of these currencies is pegged to fiat money. In contrast, blockchain-based stablecoins are created with a currency/token that is decentralized and not controlled by any central authority.
There are multiple ways people can establish a cryptocurrency as a stablecoins. First, the cryptocurrency could be backed by another cryptocurrency or other assets such as gold or fiat money. Second, a centralized entity can create and manage the value of a cryptocurrency on behalf of its users while ensuring transparency through an open ledger that tracks the price fluctuations of that particular stablecoin. Third, two different cryptocurrencies with different values can be linked together so that their fluctuations offset each other.
Different Types of Stablecoins you should know about:
1) Crypto-collateralized Stablecoins:
Stablecoins are tied to crypto assets’ value other than the US dollar. People can easily exchange these coins for cryptocurrencies via the Ethereum blockchain, or they can be used to pay for goods and services in-store.
A cryptocurrency reserve backs crypto-collateralized stablecoins. The value of these stablecoins is pegged to another cryptocurrency. It means that the reserve acts as a guarantee for holding an equivalent value in cryptocurrency as that of its initial issuance in one or more cryptocurrencies. So, for example, if crypto-backed stablecoins worth $10 are issued, then there must be $10 worth of currency (in this case, any cryptocurrency ) held in reserve by the smart contract which issues and manages the stablecoins.
2) Fiat-collateralized Stablecoins:
Stablecoins are tied to fiat currencies with stable-value crypto assets. It creates a cryptocurrency that is stable in price and backed by fiat money rather than another cryptocurrency. For example, the US Dollar Tether (USDT) is a fiat-collateralized stablecoin that is often used as a proxy for the USD in transactions between cryptocurrencies. Still, it can also be used as cash on some exchanges.
Algorithmic Stablecoins
However, as the market took off, some people began to see the downside of centralization for cryptocurrency. For instance, when a new coin is created and distributed, there is no price tag for that coin, so no one knows what it will be worth at the moment of its issuance.
Depending on how many coins are being issued, it may be possible that the currency would go up in value after its creation only to die out afterward if not enough people have bought into it. According to this concept called scarcity, an algorithm could be created that determined whether or not a new cryptocurrency was allowed to exist or not.
Why Are Stablecoins So Important?
Various coins have been created in which the coin’s value would be pegged to another or a stable asset. When first launched, these stablecoins seemed like a great idea. It solved trading volume issues and allowed users to exchange their stable currency value.
But since then, there has been some criticism of how these coins work with each other. Since they are still pegged to a single currency like USDT, it means that if one stablecoins becomes more popular, the newer one will be less valuable than before, which is not ideal for most industries that need to use these stablecoins for their business models.
For instance, some people have criticized this concept for being anti-competitive. In the case of USDT, if it were calculated with gold instead of fiat, it would be more stable and allow for price fluctuation due to real-world economic factors. On top of that is that most stablecoins do not use a beneficial consensus method like proof-of-stake, which can help with the transaction speed. The stability properties of this system rely on several assumptions, including trust and reliability.
In short, only cryptocurrency-backed stablecoins have a blockchain like the bitcoin, and fiat-collateralized and commodity-collateralized stablecoins do not incur any blockchain.
