A stablecoin is a cryptocurrency. The value of this cryptocurrency is indexed to a reserve asset such as Gold or US dollars. The most striking feature of a stablecoin is that its current value in the cryptocurrency exchange always remains constant. The basic concept of the purpose of the emergence of a stablecoin is the fact that the values of coin currencies such as Bitcoin and its derivatives are not fixed and to reduce the fluctuations experienced by these units.
Introduction
Cryptocurrencies such as Ethereum and Bitcoin, which are the most prominent and frequently mentioned in terms of popularity, do not have a centralised system in general. One of the biggest problems caused by this decentralisation is the massive price fluctuations that these major cryptocurrencies are exposed to within the cryptocurrency exchange.
Stablecoins play a big role in avoiding the aforementioned problems as a result of these fluctuations. The basic understanding of a stablecoin is to manage to prevent price instability. Ensuring the stability of the purchased coin in terms of price can keep its value almost stable from the day the buyer buys the coin to the day he spends or exchanges it.
The reason behind this stability is very simple. The stablecoin is pegged to precious metal units such as the US dollar or gold that are high in reputation. Unlike other cryptocurrencies, a stablecoin acts as a bridge because it is fixed to nominal units.
What Is Stablecoin?
A stablecoin can be considered a blended version of the current stability of traditional assets in the stock market and the flexibility of digital assets in the stock market.
Stablecoins take it upon themselves to maintain price stability if backed by a reserve asset.
The unregulated volatility of popular cryptocurrencies makes it inappropriate for investors, especially for their daily transactions within the stock market.
An existing cryptocurrency should have the ability to protect its purchasing power, while it should be an incentive to spend the tokens, which can only be accomplished efficiently if it has low inflation. In this context, stablecoins perform by this logic. It is known for certain that almost all of the stablecoins in the market are indexed to the dollar.
In the case of the issuance of a stablecoin, issuers are obliged to keep the amount of money equivalent to the coin created in the current situation in their reserves. Following this obligation, the reserves owned by the companies are regularly audited by the special authorities of the countries.
Types of Stablecoins and Use Cases
Among the many existing stablecoins, the coin Tether is known as the largest. At the time of writing, 69 billion Tethers were in circulation. This blockchain-based cryptocurrency is pegged to the dollar. From these expressions, we can deduce the following. The stablecoin is the virtual currency version of the US dollar.
Stablecoins aims to bridge the gap between virtual currencies, namely cryptocurrencies and fiat currencies.
Stablecoin derivatives can be observed in three categories.
- Fiat-Collateralized Stablecoins
When it comes to stablecoins with fiat collateral, an appropriate number of cryptocurrencies must be printed. For this money printing to take place, it is necessary to keep the reserves of the nominal currencies. In this sense, the US dollar is the most functional and respected currency by everyone. Although a reserve system has been established in US dollars, other types of collateral are also available. While it can be precious metals such as gold and silver, sometimes; may include commodities such as oil.
Despite this, when the current reserve transactions are carried out, the currency frequently preferred by the people who will perform the reserve transactions is the US dollar.
Such reserves are subject to regular rigorous audits. Within this audit, the same reserves are held by independent founders while examining whether the reserves have the required compatibility.
- Crypto-Collateralised Stablecoins
Crypto-collateralized stablecoins are supported by other existing cryptocurrencies and maintain their existence. Trends with high collateral are observed for such coins. The main reason for this is that the volatility in the reserve cryptocurrency is always present. With a simpler explanation, units that are up to 50% adaptable to fluctuations in the reserve currency should hold 2000 dollars’ worth of cryptocurrencies as a reserve for the issuance of existing cryptocurrency-backed stablecoins with a value of 1000 dollars.
With its indexing to the US dollar, the system allows the investor to use a crypto asset as a reserve.
- Non-Collateralized (Algorithmic) Stablecoins
To maintain a fixed/stable price, stablecoins adopt a mechanism similar to the central banks. For example, a consensus mechanism is used. The working logic of this mechanism is to increase and decrease the token supply of a cryptocurrency to meet the current need for relevant coins to be indexed to the dollar. This system is similar to the printing of banknotes by a central bank. Such actions are implemented in terms of the continuity of the valuation of the fiat currency.
Smart contracts and decentralised platforms help stablecoins operate automatically and efficiently.
How Do Stablecoins Work?
- In essence, stablecoins are units that work on blockchains and each of which is a cryptocurrency token. Stablecoin stability can be achieved with the promise of a loan from a reliable source, along with high-value units and publicly accepted assets.
- Stablecoins aim to achieve a price indexed to US dollars, which are stored and preserved in financial institutions, as close to 1 dollar as possible. The parallel relationship between the dollar and stablecoins in terms of value is maintained through various audits.
- The vast majority of cryptocurrencies are already exchanged, and exchange is quite common. In an environment where swap transactions are not made quite frequently, all stablecoins in existence are carried out only in fiat currencies, precious metals, or commodities. Apart from this, different fixed currencies are actively traded as a result of the intermediation and support of other cryptocurrencies.
What are the Advantages of Stablecoins?
- Minimises Volatility
In a highly volatile market such as cryptocurrencies, investors need a currency to be more secure and can adapt more easily. Stablecoins come to the fore at this stage. Considering that assets indexed and pegged to fiat currencies are not affected by volatility, the use of stablecoins is quite efficient.
- Exchangeability of Assets
Any bank account is not needed for holding stablecoins. Moreover, the transfer process can be done through a very easy method. Regardless of whether the money to be transferred is a country where transactions are made in dollars, it has an infrastructure that can be sent all over the world, which also applies to countries where the local currency is unstable or the US dollar is difficult to obtain. The process of putting all these processes into effect is quite easy through blockchain and stablecoins. In terms of time, it allows transactions to be performed in a very low time frame, which makes stablecoins a very attractive method for international money transfers.
- Speed and Privacy
One of the most important reasons why stablecoins are a centre of attraction among investors is that investors’ financial information and data are kept confidential. Moreover, the work performed in terms of speed of the transactions is at a level that will satisfy the investors.
What are the Risks of Stablecoins?
- Counterparty Risk
With the assurance that the cryptocurrency will be kept stable, the dollar may not be fully supported and there may be a partial reserve. In such a situation, a risk of falling in the price of the coin is always possible.
- Centralization Risk
In the absence of a central authority, the biggest risk is embezzlement of accounts or access to accounts by third parties. In this sense, the problems encountered may be similar to the problems faced by fiat currencies.
- Algorithm Manipulations
Another risk on projects without a central authority is that the current algorithm that keeps the currency stable is always likely to fail considering their system may be vulnerable to manipulation by third parties.
Why are stablecoins important?
The most important feature that distinguishes unpegged cryptocurrencies and pegged cryptocurrencies from each other is that fixed units do not experience any fluctuations in the stock market. In addition, the most powerful features of existing cryptocurrencies in the crypto exchange are owned by stablecoins. Some of these features are as follows;
- Transparency and Accessibility
In the operation of stablecoins, the process is shown in a completely transparent way, and promises 24/7 accessibility to any user or investor with an internet connection. In this sense, users and investors are extremely satisfied.
Bitpace and Stablecoins
Navigating the digital landscape of online transactions has become more efficient with the integration of stablecoins. stablecoins are one of the most convenient ways for businesses to make secure payments for online goods and services. When it comes to international payments, stablecoins offer a seamless solution by eliminating the complexities associated with traditional currency conversions. The process of sending and receiving stablecoin payments across borders is facilitated through blockchain technology, ensuring speed and cost-effectiveness.
Bitpace.com emerges as a pivotal player in the realm of cryptocurrency payment solutions, offering a comprehensive platform for users to embrace stablecoins seamlessly. To leverage stablecoins for online transactions, users can acquire the desired stablecoin and leverage Bitpace.com to execute payments securely. The platform not only simplifies the process but also enhances the overall user experience by providing a user-friendly interface. Bitpace.com’s support for various stablecoins further enhances its appeal, allowing users to choose from a range of options that best align with their preferences and business requirements.
For those looking to integrate stablecoin payments into their online platforms, Bitpace.com offers a robust solution. The platform’s integration capabilities empower businesses to accept stablecoin payments on their websites effortlessly. This seamless integration is a testament to Bitpace.com’s commitment to providing versatile and user-friendly services in the rapidly evolving landscape of digital payments. The supported stablecoins on Bitpace.com encompass a diverse range, ensuring that businesses can cater to a broader audience with different stablecoin preferences. As a result, Bitpace.com not only simplifies the process of incorporating stablecoin payments but also contributes to the broader adoption of stablecoins in the digital commerce ecosystem.