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Stablecoins refers to an asset class in cryptocurrency whose value is pegged on some external or reserved asset. Often, this external asset might be a fiat currency, such as an Indian Rupee or the US Dollar. Stablecoins are very popular alternatives to the existing cryptocurrencies and can bring about ‘stability,’ as the name suggests, to the trading of crypto.
Bitcoin has been known to be a notoriously volatile asset. For example, in late March 2020, Bitcoin volatility was as high as 11%, a peak in years of almost always remaining under 8%.
This volatility is something that stands as a barrier to the paramount heights cryptocurrencies can attain. A concept that combats this with ease is stablecoins. Their benefits include the fact that they bridge the gap between fiat currency and cryptocurrency. In order to ensure that cryptocurrency reaches the level of the stock market, we must study these benefits in detail.
The benefits of stablecoins
Maintaining Price Stability
Stablecoins are safe and non-volatile assets. They have a value that does not suffer from severe fluctuations like other cryptocurrencies. This makes it an ideal option to invest in. Further, being the crypto equivalent of an asset, based on the concept of the derivative, they reduce risks dramatically.
Heavy Security due to their model
Stablecoin prices and network models are all operated from a decentralized, public blockchain network. This not only ensures full transparency to all users but curbs the risk of cyber threats occurring. Further, since trusted sources back them, nobody really doubts them.
Time Efficient
Stablecoins make the whole transaction process quicker. They are implemented with smart contracts which work autonomously. Since a central authority doesn’t regulate them, financial transactions can be done at any time and faster too.
Lower transaction fees
Already, the crypto world has much lower transaction and processing costs than in the real world; this is the same for stablecoin transactions. Rather than worry about a large percentage being cut off as duty, the amount here is minimal.
Borderless Transactions made easy
Another noteworthy point is its efficiency when it comes to cross-border payments. Usually, cross-border transactions must pass through multiple checkpoints, which delays the speed of payment substantially. This problem is easily mitigated using stablecoins because of the previously mentioned blockchain model.
Types of Stablecoins
Here are the various types of stablecoins available based on the working mechanism:
Fiat-Collateralized Stablecoins
The type of stablecoins where the reserve asset is some fiat currency is known as fiat-collateralized. Here, ‘collateral’ refers to an asset that can be used in exchange for a certain amount of cryptocurrency. These reserves are regularly audited by independent custodians so that they adhere to real-world values. An example includes the Synthetic USD.
Crypto-Collateralized Stablecoins
In crypto-collateralized stablecoins, the reserve is another cryptocurrency. Since other cryptocurrencies are highly volatile and the purpose of stablecoins is to mitigate this volatility, these coins are ‘over collateralized.’ That is, to maintain a reserve of a smaller number of stablecoins, a large number of crypt tokens are kept aside.
Non-Collateralized Stablecoins
Non-collateralized stablecoins (or algorithmic stablecoins) are not pegged on any external product but maintain their price stability by depending upon some working mechanism. For example, a stablecoin may work on the consensus mechanism to regulate the supply of tokens of some cryptocurrency.
This is akin to issuing fiat currency in a bank; however, it is implemented using smart contracts since it is done on an autonomous, decentralized platform.
Some of the most popular stablecoins in use are Tether, Paxos, Binance USD, etc.
The asset of the future
Stablecoins are bits and pieces of code that work together. This means that they can be configured and features added to them based on the user’s requirements.
When we look at the existing uses of stablecoins, we can see that they’re heavily weighted towards cryptocurrency trading. Stablecoins have a lot of uses and can also be used to hold bigwig national fiat currencies accountable. In times of political upheaval, they also provide security, stability, and financial options. Further, they can also make deposits, remit money, lend money, resolve settlements, and serve as a bank substitute.
Remittance is the most important of the uses because of cross-border transfers and sending money across nations. In a pandemic creating a stir, international payments were the ones affected most, but now, with the benefits of the stablecoin, it doesn’t have to be that way anymore.
Source: Siddharth via Twitter
At WazirX, we get front-row seats to how significant a role stablecoins can play in the future. Already, an astonishing amount of trades on our exchange occurs using USDT pairs, from the larger $350 million volume we process in a day.
Frequently Asked Questions
How To Invest In Cryptocurrency Stocks?
Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
What Is Virtual Currency?
Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
Is Cryptocurrency Banned In India?
No, cryptocurrency is not banned in India. India has seen its ups and downs in the crypto sector concerning its legal status. The Reserve Bank of India (RBI) issued a circular in April 2018 advising all organizations under its jurisdiction not to trade in virtual currencies or provide services to assist anyone in dealing with or settling them. A government committee proposed outlawing all private cryptocurrencies in mid-2019, with up to ten years in prison and severe penalties for anyone dealing in digital currency. The Supreme Court overruled the RBI's circular in March 2020, allowing banks to undertake cryptocurrency transactions from dealers and exchanges.
Are Cryptocurrencies Legal In India?
In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.
What Is Cryptocurrency?
A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.
Is Crypto Legal In India?
Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India
Are Cryptocurrencies A Good Investment?
Cryptocurrency has the potential to make you extremely wealthy, and the potential to cause you to lose your money. Crypto assets, like any other investment, come with many risks and potential rewards. Fundamentally, cryptocurrency is an excellent investment, particularly if you want to gain direct exposure to the demand for digital currency.
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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