Can Crypto Counter Volatility With The Stablecoin?

Have you come across a situation in life where the success of something proves the inevitability of a manifestation, but at the same time, it also presents a case that goes against another manifestation? This is precisely what happens with cryptocurrency exchanges.

Cryptocurrency exchanges can be credited for bringing the goodness of the blockchains technology and cryptocurrency in general to the common man. The massive fluctuations in the values of crypto have been responsible for creating millionaires if not billionaires. The volatility of cryptocurrency has been instrumental in feeling cryptocurrency exchanges as a business.

The Problem Of Volatility

The same volatility that makes cryptocurrency exchanges possible is the numero Uno deterrent for people not accepting cryptocurrency as a valid method of payment. Just imagine if you were to sell your Lamborghini for some crypto coins, and the very next day, with the same crypto coins, you can buy only a pizza!

While that example might be exaggerated, you cannot completely illuminate the possibilities of that happening. This presents crypto enthusiasts with a quandary. On one side, they would want all the advantages that cryptocurrency and the blockchain technology brings in like the global reach of transactions, rendering obsolete the banking system, the establishment of trust without the involvement of third-party, and highly efficient, fast, and cheap global transactions. On the other side, they also want cryptocurrency to be stable in its price or at least maintain an acceptable band of fluctuation in its value.

How Does This Volatility Occur?

The simple reason for volatility in crypto is that although it is meant to be decentralized, 20% of all the bitcoin is held by a little less than 500 people on this planet. These people are fittingly referred to as whales. If they decide to dump their bitcoin, the price is going to plummet.

It is the presence of such market-altering forces and the absence of centralization that contributes to the heavy fluctuation in prices.

This puts the very important question of whether or not a fine line can be achieved between the advantages of crypto and the problem of volatility. Turns out we already have the answer and the answer is stablecoins.

What Are Stablecoins?

The stablecoin, as the name implies, it’s a crypto coin and that is designed to maintain stability in pricing. In most cases, the price of a stablecoin hovers around the vicinity of one US dollar. Tether, one of the most famous and recognized stablecoins has been tied, or in its language, tethered to the US dollar, and that gives rise to its price stability.

How Do Stablecoins Establish Stability?

Stablecoins establish their stability by the virtue of collateralization. The value of the stable crypto coin is backed up or tied up or in technical terms, collateralized by a real-world asset, although not in all cases. Let us take the simple example of the Tether.

For every coin issued, a US dollar is kept in its results. Therefore, stability is maintained by controlling the demand and supply. Even when it comes to collateralization, there are three different types of stablecoins. Before we look at them, let us look at the advantages and disadvantages of the stablecoin.

Pros And Cons Of The Same Coin

The stablecoin is expected to be the first step in bringing Crypto coins closer to mainstream adoption. It is an ideal crypto coin for people who would like to invest in something that might not grow big and might not fall too much in its value. Needless to say, it brings all the advantages of blockchain technology without imposing the ambiguously disadvantageous volatility of crypto. It also brings in the advantage of being regulated as it comes under regulatory processes of the fiat currency.

Stablecoins, however, required third parties to establish trust. If the third party is not trustable, it might lead to questions. It needs to be externally audited periodically, so the assets are properly accounted for. It might not be the ideal avenue of investment for people who look to make big profits while taking the risk of big losses. Crypto purists feel that the stablecoin defeats the entire purpose of cryptocurrency being created as it gets into the loop of regulation and censorship again.

The Three Different Types Of Stablecoins

Based on the asset that collateralized the stablecoin, they are divided into three categories: fiat collateralized, crypto collateralized, and non-collateralized.

Fiat collateralized stablecoin is the simplest to understand. The production and liquidation of the coin is taken care of by the entity that issues the coin. In a very loose way, it is similar to the first while gold standard of the currency system which stated that the used amount of gold should be kept in the safe of the central bank for every dollar that is printed. The stability of the price is maintained because if you buy the coin for less than one dollar, you can exchange it with the issuer for one dollar, and this process can also work in the reverse direction. You might have observed that there is an inherent flaw in the system which puts heavy dependence on the issuing body. It is important that the issuing party is properly regulated and it owners deposits and withdrawals from all over the world. Fiat collateralized stablecoins can also be backed by other real-world assets like gold.

Crypto collateralized stablecoins might seem a bit ironic. If the value of cryptocurrency is unstable, how come cryptocurrency can stabilize the value of another coin, you may ask. The stabilization is achieved by a set of protocols to ensure that the price remains at one dollar. The secret to this Stability is over-collateralization. If we need to deposit $20 for getting $10 worth of stablecoins, the stablecoin is now collateralized at 200%. Even if the price of the coin drops by 25%, the stability can still be maintained because the collateral back in the value still has $15 of backing.

Non-collateralized stablecoins take the irony to another level. It makes us ask how stability can be established if there is no collateralization. Come to think of it, the fiat currency that we consider stable and use as a benchmark of stability is also not collateralized! It is managed by regulating bodies like the United States federal reserve. It creates a system that will mint more coins or buy back coins depending on the direction of demand and supply.

Conclusion

Stablecoins can be considered a landmark in the history of crypto because it is going to help the technology progress towards mainstream adoption but with a few changes and compromises. All said, stablecoins are the best but the crypto world has right now to enter into mainstream transactional usage. Now would be a good time for any entrepreneur to create stablecoins.

The entrepreneur can consider approaching some of the best stablecoin developers or a renowned stablecoin development company. They will take care to understand the requirement and present you with perfect stablecoin solutions that will help you see your profit in the new and promising dimension of crypto that lies instability rather than volatility!