Why do we need Stable Coin?
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What is Stable coin?
Stable coins aim to become global, fiat-free money that is programmatically issued and tracked with the use of blockchain technology.Stablecoins fall into the category of payment tokens ,whose main purposes are store of value,medium of exchange,or unit of account.Unlike other cryptocurrencies such as Bitcoin and ether,stablecoins by design aim to achieve stability and decrease the volatility that is frequently associated with cryptocurrency markets. The main benefits that stablecoins strive to create are price stability, scalability ,privacy, decentralization and redeemability.
Stablecoins work as a bridge between the world of crypto and the world of fiat currencies. The companies use some centralized authorities that back every coin with one-to-equivalent in USD or Crypto and controls the price volatility.
Types of Stable Coins:
There are three Principles models used with the aim of enabling stablecoins to achieve their characteristic price stability.
Model 1: Fiat-Collateralized
Stablecoins are backed by an existing currency such as the USD.The issuing company holds assets in a bank account or vault(or works with a third party provider that does so on their behalf).The coins represent a claim on the underlying assets. This works similarly in cases where the coin is backed by gold or another Precious metal.
Model 2: Crypto-Collateralized
Crypto-Collateralized model has the benefit of decentralization, as the collateral is held in a smartcontract which does not require trust in a central party.However,the stablecoins in this model might need to be overcollateralised in order to account for the price volatility of the cryptocurrency collateral.
Model 3: Non-Collateralized
Stablecoins are not backed by any outside collateral but by a type of self-sustaining economic system. The value of the stablecoins is maintained through the use of a system which, for example, expands and contracts the supply of the coin based on an algorithm. This operates in a similar manner to the way in which central banks maintain the value of fiat currencies, but can be done in a decentralized manner.
Role of Stablecoins:
Stablecoins were created to solve the top problem of cryptocurrencies such as price volatility and interaction with the real world money and markets.
To do so, Stable Coins companies make a partnership with the issuer to ensure that the price will stay the same in any cases. That also allows to easily redeem crypto to USD With no limitations. Another benefit of stablecoins –they are customer friendly. You don’t have to think about the rates of the crypto, there are low possibilities to lose the funds because of the price changing, it’s convenient system for cross border payments.
Advantages of stablecoins:
The key advantage of stablecoin is their practical application for everyday transactions without the level of price fluctuations associated with other cryptocurrencies.This stability has the potential to be particularly valuable as an alternative to cash in countries where there is hyperinflation and monetary instability. Quicker and cheaper transfers can facilitate trade, and the use of stablecoins and distributed ledger technology also has the potential to increase financial inclusion by providing a universally accessible peer –to-peer Payment system.
Future and Challenges:
User experience is also a potential barrier to the mass adoption of stablecoins, as owning and using cryptoassets can be challenging, particularly for retail users or investors. Widespread adoption at a consumer level will only be possible if platforms offer a similar level of simplicity, efficiency and security as traditional bank payment solutions as well as the same level of trust. Many stablecoins are currently looking to establish and engender trust and confidence with users, and best practices are beginning to emerge around engaging in audits of the underlying code, audits of the entity’s balances through attestations, proving transparency around their banking relationships, custody measures and insurance arrangements, and providing visibility around their regulatory posture.
However, stablecoins have the potential for significantly greater practical usage and wider adoption than other cryptoassets to help move transactions and trades from traditional financial markets onto the blockchain technology. In this way, the development of stablecoins has the potential to drive significant change in national economies and ultimately on a global level.