Owing to the fact that the cryptocurrency markets are subject to only the forces of market supply and demand, they remain rather volatile. Supply and demand can swing within hours, causing sudden changes in the prices of cryptocurrencies. In such a volatile ecosystem, almost zero financial institutions can exist and operate.
When you compare cryptocurrencies with more established markets like the real estate market and the equities market, crypto markets are relatively small. They have multiples higher market capitalizations than the crypto market.
A smaller market capitalization on the other hand means a higher volatility. as mass adoption grows, the liquidity injected into the cryptocurrency will see the market capitalization of crypto grow, and volatility decrease.
The perceived instability of the cryptomarkets is also another reason keeping potential investors at bay. If indeed the modern financial complex is going to shift to the blockchain, some sort of stability needs to be established soonest.
Stablecoins are the perceived modern answers bridging the gap between traditional markets and cryptocurrencies. Being a class of cryptocurrencies pegged to real reserve assets, they offer some stability. Such assets include Gold, Silver, US Dollars, etc. Effectively, stablecoins offer the best of both worlds; the speed, security, and global scale of cryptocurrencies coupled with the stability of traditional finance.
Through stablecoins, traditional financial services like credit and debt markets, decentralized insurance, and prediction markets operate on the blockchain, where the rules are level for every player regardless of their size or history. Given that they operate in real-time, stablecoins could also make it easier for businesses to accept payments, and for governments to run cash transfer programs like stimulus checks.
A mix of smart contracts, algorithms, and collateralization provides a stable ecosystem where stablecoins reliably interact with their reference assets, and their derivatives. This allows for the prices of stablecoins not to swing as wildly as that of cryptocurrencies.
By existing on a blockchain, stablecoins also stand to enhance the transparency and accountability of public accounting systems. It would be virtually impossible to mismanage national economies which exist on the blockchain in the form of stablecoins.
Besides, stablecoins are likely to end up playing key roles in global payments systems and in transactions between businesses. Discussions about stablecoins are now happening in the mainstream, with various government institutions across the globe proposing and reviewing regulations to govern the sector.
Types of Stablecoins
Two main classes of stablecoins exist, depending on their method of collateralization;
1. Fiat-Collateralized Centralized Stablecoins
These ones are backed by Fiat Dollars, thus relying on a centralized actor to issue them at a 1:1 ratio for the underlying asset. Basically, it is the Fiat currency, digitally expressed. This 1:1 stability mechanism adds to the overall stability of the stablecoin, making it simple to understand as well as hard to hack into since no collateral value is held on-chain. Examples include; Tether (USDT), TrustToken (TUSD), Gemini (GUSD), Paxos (PAX), and Circle (USDC).
Since it is centralized and controlled by a single entity, it is subject to geopolitics, and the whims of the government of the day. This type of stablecoin is too similar to the traditional monetary and banking system as we know it, which cryptocurrencies generally try to steer away from.
2. Crypto-Collateralized Decentralized Stablecoins
This type of stablecoin is backed by cryptocurrency assets and is issued on-chain. They are decentralized, therefore free from censorship and government interference. Besides, they are more transparent and easy to audit. A stand-out advantage is also that they are easy to monetize or convert into their underlying cryptocurrency collateral. Examples include; MakerDAO and Havven
A key point of contention for this type of stablecoin is the volatility of the underlying cryptocurrency asset. Stablecoins are generally a step in the correct direction, being that they take back some of the power of governments, giving it back for fair market cycles and perfect competition.
Popular Stablecoins Ranked by Market Capitalization
- Tether (USDT) – $1.26 Billion market cap
- USD Coin (USDC) – $40.61 Billion market cap
- Binance USD (BUSD) – $13.6 Billion market cap
- TrueUSD (TUSD) – $1.26 Billion market cap
- Pax Dollar (USDP) – $944 Million market cap
- Gemini Dollar (GUSD) – $222 Million market cap
- DAO Maker (DAO) – $379 Million market cap
Their growth rate might be one reason to invest in stablecoins, since you will likely see a growing return on your investment. It is however prudent for every investor to remain prudent, especially considering the rapidly changing regulatory environment about stablecoins and cryptocurrencies in general.
TOP 10 CRYPTOCURRENCY
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