For a while now, you might have heard the term “Stablecoin” becoming the next candidate for digital currency. This statement got traction since the value of cryptocurrencies – Bitcoin, in particular, experienced a huge dip in its exchange rate since the latter half of 2021. Other cryptocurrencies are also having a decline in their exchange rate, and at times the volatility plays out even in a matter of hours. This volatility along with the unregulated and decentralized nature of cryptocurrencies has made the forte stronger for stablecoins to become an integral part of blockchain-enabled financial transactions.

Stablecoin – An Introduction

A stablecoin is a digital currency that is pegged to a fiat currency or gold or even precious stones. The value of these coins is decided based on the market fluctuations of the commodity, it is pegged to and mostly, volatility would be kept minimal just like the real world. This relieves investors of the potential risk of losing their purchasing power in a matter of days or even hours, which had happened previously in the case of cryptocurrencies.

Also, regulations would be in place to ensure that enough reserves are present so that any unprecedented volatility can be combated easily. Most stablecoins are a US phenomenon, meaning that they are pegged to the US Dollar, while others have pegged to the Euro, the Swiss Franc, and even the Swedish Krona.

Some developed countries have seen a drastic fall in the usage of physical currency for transactions and are researching the possibility of having their own stablecoins. England, Australia, Singapore, Canada, and India are some prominent nations doing so.

Some Salient Features of Stablecoins

Stable coins have some great features in theory and with the current financial and internet situation, these can become a reality. Some of them include:

• With the ever-changing monetary value based on fossil fuels, stablecoins can positively disrupt the financial sector providing sustainability in the long run. 

• Unlike cryptocurrencies, which most people do not have access to owing to their high costs, stablecoins offer the solution of being accessible to all just like physical currency. It is as simple as the fact that you can transact these coins on a smartphone even without a bank account. 

• Cross-country transactions can become quicker and cheaper as the involvement of multiple banking institutions is not required unlike traditional bank transfer.

• Stablecoins provide enough liquidity and even in the case of an increase in prices, institutions can mint additional tokens as they would have enough money in their reserves.

• These coins can also serve as governance tokens, thus enabling its holders to participate and contribute to any future changes in the regulation of the stablecoin, thus ensuring collective decisions are taken.

• As these currencies use cloud-based mining techniques, mining stablecoins becomes possible to almost any internet user. Usage of the cloud technology also ensures that transactions are completed quickly and more energy is conserved. 

Various Types of Stablecoin   

Stablecoins come in three types – Namely fiat-backed, crypto-backed and algorithmic (no backing). Let us see each of them in detail.

• Fiat-backed Stablecoins: These are pegged to a prominent and stable currency and maintain a fiat reserve as collateral to mint a suitable number of such coins. Most fiat-backed stablecoins use the US Dollar as the collateral, with the prominent ones being Tether (USDTUSD) and TrueUSD (TUSDUSD) setting themselves at 1 US Dollar with enough fiat reserves.

• Crypto-backed Stablecoins: These coins have prominent cryptocurrencies such as ether or BSC (Binance Smart Chain) as the collateral and maintain cryptocurrencies in their reserves. Since cryptocurrencies are prone to high amounts of volatility, the reserves need to contain cryptocurrency at least double the pegged worth of stablecoins. Due to this and growing apprehension towards cryptocurrencies, this method is not very popular among stablecoin firms.

• Algorithmic Stablecoins: These coins, otherwise called non-backed stablecoins are not backed by any currency. Instead, they work with a mechanism resembling a nation’s central bank, to regularly monitor the value of the coin. This is possible due to the advent of smart contracts, which can run autonomously once initialized.   

Regulatory Measures on Stablecoins

Since stablecoins have been in existence, several regulators have advocated their concerns on the need to regulate these upcoming digital currencies. Such concerns are a result of multiple instances of stablecoin issuers taking advantage of the users’ trust in them. Many financial bodies have begun issuing regulations on stablecoins and more are being framed. It just needs a superpower or two to frame an official regulation and others would soon catch up.

Why Should You Invest Now?

If you are pondering why you should invest in these seemingly new currencies, here is a big reason – Most crypto exchanges do not charge a transaction fee while exchanging such stablecoins. As a result, more people exchange their cryptocurrency to stablecoins before exchanging these coins for fiat money and vice versa. Along with this, all the salient features of the stablecoin and also the possibility that most governments would approve these or issue their own version of these can be some great factors to be taken into consideration. Additionally, we might never know when the stablecoin will have its period of boom. So, buying these coins while they are relatively cheaper is a wise investment trick, although understanding all the related terms and conditions is a must.