What are Stablecoins and how will they be used?
Stablecoins are a type of cryptocurrency that are pegged to the value of a fiat currency, commodity, or other asset. The most common form of stablecoin is pegged to the value of the U.S. dollar, but there are also stablecoins that are pegged to other currencies, such as the euro or the Japanese yen, as well as commodities like gold or oil. The goal of stablecoins is to provide a more stable and predictable value compared to other cryptocurrencies, such as Bitcoin or Ethereum, which can be highly volatile.
One of the most popular stablecoins is Tether (USDT), which is pegged to the value of the U.S. dollar. Tether is issued by Tether Limited, and it is backed by an equivalent amount of U.S. dollars held in reserve. This means that for every Tether in circulation, there is a corresponding dollar held in reserve. This helps to ensure that the value of Tether remains stable and that it can be exchanged for U.S. dollars at any time.
Another popular stablecoin is DAI, which is pegged to the value of the U.S. dollar, but it’s a decentralised stablecoin, built on the Ethereum blockchain and is collateralised by other cryptocurrency. DAI is created by locking up other cryptocurrency as collateral, then issuing DAI against that collateral. The value of DAI is maintained by adjusting the collateralisation ratio and adjusting the interest rate on the DAI borrows.
Another form of stablecoin is the commodity-backed stablecoin, which is pegged to the value of a physical commodity, such as gold or oil. For example, DigixDAO (DGD) is a stablecoin that is backed by gold. Each DGD token represents 1 gram of gold and the value of DGD is tied to the price of gold. Similarly, Petro (PTR) is a stablecoin that is backed by oil, which is issued by the Venezuelan government.
Stablecoins have many potential uses and advantages. One of the most important advantages of stablecoins is that they can provide a more stable store of value compared to other cryptocurrencies. This is particularly important for businesses and individuals who need to make transactions in a stable currency. Stablecoins also offer the ability to move funds across borders quickly and cheaply, making them an attractive option for international trade.
Another advantage of stablecoins is that they can provide an easy way to enter and exit the cryptocurrency market. For example, if you want to buy Bitcoin or Ethereum, you typically need to go through a cryptocurrency exchange, which can be a time-consuming and complicated process. With stablecoins, you can simply buy or sell the stablecoin for the equivalent value in U.S. dollars, making it much easier to enter and exit the market.
In addition, stablecoins can provide a way for businesses and individuals to get involved in the blockchain and cryptocurrency space without having to deal with the volatility of other cryptocurrencies. For example, businesses can use stablecoins to make payments, without having to worry about the fluctuations in value of other cryptocurrencies.
Furthermore, stablecoins can also be used as collateral for loans and other financial products. For example, if a person holds stablecoins and wants to borrow money, they can use their stablecoins as collateral. This allows them to borrow money without having to sell their stablecoins, which can be a more attractive option than selling other types of cryptocurrency.
Finally, stablecoins can be used in decentralised finance (DeFi) platform and applications, which are built on blockchain technology, DeFi has been growing rapidly in recent years, and stablecoins can provide the stability and predictability that is needed for these types of platforms and applications to function effectively.