With stablecoins now accounting for over 80% of daily transaction volume on the Ethereum blockchain, stablecoins will continue to play a vital role in blockchain adoption.
What are Stablecoins
In short, stablecoins are cryptocurrencies that are pegged to a centralized currency, hence the term “stablecoin”. These cryptocurrencies experience little to no price volatility as they will always be redeemable for a set value.
How They Work
Stablecoins operate on the immutable blockchain in the form of tokens. Almost half of all stablecoins operate on the ERC20 token platform. ERC20 tokens operate solely on the Ethereum blockchain. Unlike traditional cryptocurrencies, ERC20 tokens utilize Etheruem’s blockchain to process and record transactions. On a side note, ERC20 tokens can also harness Ethereum’s smart-contract technology.
Stablecoins work by ensuring that one token will always be equivalent to one unit of the centralized currency (eg. US Dollar) backing it. As a result, each token should theoretically always be redeemable for $1.
Thus, the circulating stablecoin supply must equal to the value of physical assets to ensure that all stablecoins are redeemable. As a result, audited reports proving that there are enough assets to account for the circulating supply is crucial to stablecoin value.
When stablecoins are properly audited, they provide immense benefits to individual traders, financial institutions, and national governments.
Alleviating Price Volatility
One of the largest hindrances of cryptocurrency mainstream adoption is its price volatility. Unlike traditional securities, cryptocurrency prices are based solely on supply and demand. In combination with crypto’s micro-cap, price volatility is huge.
As a result, many institutions turn away from cryptocurrencies and ultimately blockchain technology. However, stablecoins alleviate the price volatility as stablecoins are pegged to a centralized currency.
Stablecoins are considerably more risk-averse than traditional cryptocurrencies. Thus, institutional traders can utilize stablecoins when they need to liquidate into a less risky asset but still want to hold funds in a cryptocurrency. This allows traders to avoid withdrawing fiat and minimizing the time to enter the market again when an opportunity arises.
Although not traditional cryptocurrencies, stablecoins utilize blockchain technology. This allows for immense scalability, rivaling centralized payment processors like Visa.
In addition to the immutability and decentralization of blockchain, blockchain scalability allows stablecoins to function flawlessly during times of transaction overload. Many centralized systems have limited operating capacities and often are degraded during over-usage. With blockchain, technology institutions will be able to offer customers higher transaction throughput.
Stablecoin projects are also an integral part of the decentralized finance ecosystem. This is especially important as decentralized finance is leading blockchain adoption with many financial institutions noticing the potential.
Stablecoin tokens allow financial institutions to transfer funds across borders in a quicker and more cost-efficient manner as blockchain technology does not face border or government restrictions. Furthermore, stablecoin transaction fees are usually only a few cents, regardless of where the destination of the transaction is. As a result, many financial institutions have begun to research stablecoin applications.
With financial institutions continually looking for ways to innovate and stay ahead of the technological curve, stablecoins will continue to see an influx in users and ultimately, transactions. As the stablecoin adoption grows we will see an increase in blockchain adoption and vice versa. Stablecoins offer institutions an on-ramp into blockchain and cryptocurrency technology. By alleviating the risk involving cryptocurrencies and harvesting the massive potential of blockchain technology, institutions have a lot to gain.
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