Stablecoins is a special type of digital commodity. As the name suggests, the value of a stablecoin token is supposed to be stable, priced equally to that of a real-world currency, such as the dollar or gold, and is frequently used in their place.
Advantages of Stablecoins
1. Adding Volatility
Many of cryptocurrencies exchanges face lack of fund ready because it is quite hard, expensive, and slow converting fiat to crypto in the past.
Stablecoins come as perfect and fast solutions to stop traders and investors convert their bitcoin or other crypto assets to fiat currency.
In a way, stablecoins are digital IOUs to be used instead of sloppy, sluggish (and expensive) real-world currency. Since the swap of one digital asset for another is usually a simpler, cheaper method than exchanging in and out of fiat currencies, stablecoins are also seen as a promising first phase on the road to financial revolution.
2. Increasing Trust Level
Usually a single entity creates, issues and maintains the circulated stock of a stablecoin.
Though there are many kinds of stablecoin, those operated by private firms with ample equity to back up their tokens of real-world assets tend to provide less risky goods, particularly if they have proof.
So as long as we disregard this centralizing aspect, the advantages presented by stablecoins to cryptocurrency traders are various and definitely noteworthy.
How Do Stablecoins Work
Let’s use Tether (USDT) as an example to explain how stablecoins function.
Pretend I’m an investor, and I want to invest into a cryptocurrency project that I’ve been studying. It is also the case that the only liquid markets open to many altcoin ventures — such as the one I’m involved in — operate solely on platforms that do not endorse fiat currency.
This means that if my new investment goes up in price, I will just sell it and pay in another digital currency like Ethereum or Bitcoin.
Although as you know, the prices of these are unpredictable, which may mean that the monetary benefit I gained from investing in the altcoin will immediately vanish if the value of the bitcoin decreases.
Join a stablecoin much like Tether (USDT). I can easily hop into and out of cryptocurrency markets by using USDT as my home base without risk of losing importance to my home base.
I can trade in and out of USDT, sell my digital properties to more Tethers than I used to purchase them, and buy less than what I sold them for.
This process only carries weight if there is certainty that the organization behind Tether currently has a dollar for every USDT in circulation. After all if I’m only looking to make money, I actually want to make some profits at some point.
I need to be in a position to trade my USDT for cold hard cash. Many stablecoins claim they can do this but discovering signs of this really happening is almost unlikely.
However, stablecoins are perfect for trading, particularly as the cryptocurrency exchanges that use them typically have a long list of relatively liquid markets. They are fast, compatible with other digital assets, and have actually helped the cryptocurrency market during some of the darkest times.
Problems with Stablecoins
First, stablecoins aren’t all that stable. Some are related to real-world properties, which, like every other commodity, fluctuate in price. Others either keep collateral in other risky cryptocurrencies or have complicated bond schemes that aim to guarantee liquidity dependent on potential development.
Second, flawing the concept of cryptocurrency. If stablecoins seek government approval to strengthen investor interest, it also means that they must comply with government regulations. Restricted stablecoins such as the USDC Circle and the Winkelvii-backed Gemini Dollar (GUSD) enable users to register themselves and can restrict individuals with previous convictions for money laundering.
Many of the latest controlled stablecoins are meant to be traded solely on exchanges that enable identification certificates to be submitted until live trading is allowed, as the restrictions are expected to shield the investor from being exposed to cryptocurrency money launderers.
When these rights are delegated to individuals, we have essentially swamped the sovereignty of one nation-state with another, although a digital one.