Bitcoin is the market leader in cryptocurrencies, and it is the primary trading currency on several exchanges. Similar to Bitcoin, stablecoin is a new cryptocurrency, however unlike bitcoin, its value is just constant and is backed by any assets. The stablecoin has many real-world applications and is increasingly taking the place of bitcoin in the cryptocurrency world.
Here, we’ll go through the main idea of stablecoin vs. bitcoin in detail and some fascinating stablecoin facts.
Everyone is aware of Bitcoin. Rite? Have any of you heard about stablecoins? No problems if not Let’s briefly talk about “Stablecoins” here.
Satoshi Nakamoto created the first digital money, Bitcoin, in 2008. The two cryptocurrencies that are most widely utilized are Bitcoin and Ethereum. This kind of virtual currency uses decentralized, encrypted trades.
What is a stablecoin?
The word “Stablecoins” has appeared in recent stories about the cryptocurrency industry. Stablecoins are digital currencies that were also created to lessen price fluctuation. These cryptocurrencies are indexed to the value of any other cryptocurrency, fiat money, trade commodity, or commodity.
Stablecoin vs. Bitcoin
Due to the characteristics of stablecoins, those who enjoy investing in bitcoins also do so in stablecoins.
Why are stablecoins gaining traction over bitcoin?
Stablecoins maintain their price stability, most notably remaining at parity with the US dollar even when all other crypto coins see sharp increases or decreases in value.
In the present crypto environment, there are two key elements that determine how popular stablecoins are.
Stablecoins control the erratic cryptocurrency market
Unlike other cryptocoins, stablecoins don’t have a finite quantity or a set timeline. Instead, stablecoin distribution is determined on the economics and circumstances of the market. These stablecoins are backed by any form of collateral in order to protect investors from price fluctuations in the cryptocurrency market.
An example of a stablecoin is Tether, which states that it has as much dollars in an unidentified account as it does tether currencies in circulation. Because stablecoins’ prices are stable, they can be used to pay for goods, trade for fiat money, or purchase other cryptocurrencies.
The initial step in buying cryptocurrencies on some exchanges, including Bitfinex, is purchasing Tether, which trades at parity with the US dollar. Then, you may use this Tether coin to purchase other cryptocurrencies.
An increase in venture capital funding
The type of the influx of venture capital funds is the other major aspect that affects the growth of stablecoins. This result might appear strange given that stablecoins’ lack of price fluctuation reduces the likelihood of an investment making a profit.
For venture capitalists and normal investors, the possibility of new business models emerging in this stablecoins market offers a means of financial gain.
Stablecoins are created with the non-variable pricing of any assets in mind, as was previously discussed. Let’s examine stablecoin types in this section.
There are four different kinds of stablecoins.
- Collateralized by Fiat
- 2. Non-collateralized,
- Commodity-backed collateral
Stablecoins that are backed by cryptocurrencies include those that are crypto-collateralized. The over-colleterization of these stablecoins ensures that they keep their 1:1 ratio.
For instance, DAI, a stablecoin launched by the blockchain company MakerDAO and backed by another cryptocurrency. Another popular cryptocurrency-collateralized token is BitUSD, which is collateralized by Bitshares.
Stablecoins with collateralized by goods
Non-collateralized stablecoins are those that aren’t backed by other currencies or commodities like oil or other precious metals like gold. Commodity-collateralized stablecoins are another name for this class of stablecoins.
The finest example of a commodity-collateralized stablecoin is Digix, which is backed by gold and has a value on the Ethereum network of 1 DGX = 1 g of gold.
Tiberius Coin (TCX), which is backed by a combination of 7 precious metals that are frequently utilized in hardware technology, is another example of a stablecoin that is collateralized by commodities. The underlying theory is that as these metals are employed to manufacture technology more frequently, TCX’s value will rise.
Stablecoins without Collateral
Non-collateralized stablecoins are stablecoins that aren’t backed by any assets but instead utilize algorithms to control their supply or demand.
Examples of non-collateralized stablecoins include kUSD and CarbonUSD (Carbon) (Kowala).
Applications of Stablecoins in the Real World
Similar to blockchain technology, stablecoins are still in their infancy. As a result, stablecoins have numerous real-time applications, some of which are listed below:
As a medium of exchange
Stablecoins are virtual coins that are guaranteed and secured by law, making them just like fiat money that can be used in everyday transactions.
Given that there won’t be any exchange of different fiat currencies, these are also very helpful for international payments.
As an illustration, consider IBM’s launch of a stablecoin backed by FDIC-insured banks.
With the creation of stablecoins, IBM and Stellar introduce new sets of capabilities for international payments.
In simplifying peer-to-peer and recurring payments
Without the need for a third party to act, smart contracts automatically carry out coding that initiates transaction between two counterparties. This kind of transaction is traceable, irrevocable, and transparent, making them perfect for paying loans, rent, subscriptions, and many other things.
When stablecoins are utilized in this procedure, transaction costs and processing time are significantly reduced.
Remittances for migrant employees that are inexpensive and quick
Sending remittances through businesses and their family to obtain money back becomes difficult for migrant employees. It is a slow yet economical process. To make the procedure effective, the idea of cryptocurrency is added.
The procedure might be greatly improved using stablecoins. The usage of digital wallets by migrant workers and their families allows them to transfer and receive stablecoins almost immediately, cheaply, and without price volatility from any location in the world.
Defense against local currency crashes
Every few weeks, on average, the cost of commodities doubles. Stablecoins can be utilized to prevent the value of fiat currencies from falling.
By enabling them to instantly convert their declining/fiats currency into a stable currency, stablecoins may provide an important answer to all those problems and shield them from additional price declines.
Improved cryptocurrency exchanges
Due to regulations, there are currently very few cryptocurrency exchange platforms that support fiat money. Because stablecoins allow exchanges to offer crypto-fiat trading pairings by using USD-backed stablecoins instead of US Dollars, this issue can be avoided.