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Are stablecoins safer in comparison to regular cryptocurrency?

A relatively new entry in the crypto digital asset world, stablecoins have fast risen to prominence and for all good reasons. These are a form of cryptocurrency but not in the exact sense you talk about regular cryptocurrencies like Bitcoin or Ethereum. As the name says, stablecoins are developed to offer a “stable” alternative to highly volatile cryptocurrencies. These cutting-edge altcoins are designed based on the concept of “collateral” that assures the “stable” quotient. The “collateral” here is generally a kind of reserved assets like a fiat currency or some kind of commodity such as gold, real estate, or oil. Backing from a stable asset reduces the high volatility factor and eventually makes stablecoins a comparatively safer investment option than regular cryptocurrencies.

One of the most popular digital assets today, stablecoins currently boasts a fast-rising market value. When it comes to the market cap for stablecoins, the numbers have already surpassed around $100 billion. As of now, the total market cap for stablecoins amounts to a whopping $170 billion.

The most popular stable coin today is Tether (USDT). Launched in 2014, it’s one of the pioneering stablecoins and officially the most stable of all stablecoins. Tether (USDT) is also the 4th largest cryptocurrency.

Overview of stablecoins

Stablecoins are an exclusive blend of the best of both worlds- fiat currency and cryptocurrency. More precisely, these altcoins are uniquely designed to offer the strengths of fiat and cryptocurrencies as well as eliminate the drawbacks of both.

Akin to other cryptocurrencies, stablecoins are developed on the advanced immutable and decentralized blockchain technology. The underlying blockchain technology guarantees multiple advantages such as faster payments, optimum safety of transaction data, and strong defense against forgery.

On the other hand, given their collateral support, stablecoins do not pose a high volatility risk to regular cryptocurrencies. Again, since these are essentially cryptocurrencies, stablecoins are never under any sort of centralized control that you find with traditional fiat currency.

Top features of stablecoins

  • Stablecoins are always pegged to reserve assets, mostly major fiat currencies like British Pound, Euro, or US Dollar
  • Stablecoins are tied to their collaterals in 1:1 ratio. For example, if a particular stablecoin has been pegged to US Dollar, 1 unit of that stablecoin will be equivalent to 1 USD.
  • Much like any other cryptocurrency, stablecoins allow P2P payments or transactions without interference of a centralized authority
  • Stablecoins are backed by blockchain technology
  • Other than one single fiat currency, stablecoins can also be tied to a group of currencies, a precious real-life commodity or, in some cases, cryptocurrency
  • Stablecoins are used more as a “store of value” than mode of exchange/payment.

Types of stablecoins

Stablecoins can be divided into 3 major types-

Fiat-backed stablecoins

The most common of all stablecoins, fiat-backed options are those stablecoins whose value has been backed by traditional fiat currency. The collateral here (fiat currency) is held by a 3rd party financial entity that serves as the custodian of the altcoin. Fuat-backed stablecoins have to undergo regular audits.

It’s to stress here, that every amount of specific fiat currency assigned to back a stablecoin must mirror the stablecoin’s overall circulating supply. Fiat-backed stablecoins can be pegged to one single fiat currency or multiple fiat currencies as well.

Cryptocurrency-backed stablecoins

As the name says, these stablecoins are pegged to cryptocurrencies. Unlike fiat-based collateralization that happens off-chain, the collateralization of crypto-backed stablecoins happens on the blockchain through smart contracts.

Algorithm-backed stablecoins

Also known as Seigniorage-style stablecoins, these coins are backed by a set of algorithms. Value of algorithm-backed stablecoins is controlled supply & demand through algorithms that eventually helps to stabilize the price.

Benefits of stablecoins

  • Safer investment option

Stablecoins were primarily designed to curb down the high volatility risks posed by regular cryptocurrencies. As these coins are tied to a relatively more stable external asset, they can assure less price volatility compared to other crypto assets. As a result, stablecoins can ensure more stability for the investors.

  • Easier and faster cross-border payments

As stablecoins are powered by blockchain technology, these coins can assure a faster and more convenient processing of payments, in comparison to traditional fiat-based payment systems. Moreover, unlike the traditional banks, the stablecoin market is always open 24/7 and that assures quicker settlement of payments too.

  • Lower transaction fees

All traditional payment processing mediums, say credit cards, charge a sizable commission for each payment made through them. But stablecoin payments can help to avoid these unwanted transaction fees.

  • Transparency

Stablecoins are built on blockchain that helps them to assure complete transparency of transaction data.

  • Easy customizability

Stablecoins allows easy addition of features and modifications to meet growing needs of the users, For example, Walmart is slated to build loyalty programs into their branded stablecoin.

  • Advanced safety

Blockchain, the underlying technology of stablecoins, represents an immutable ledger that can’t be manipulated. As a result, your stablecoin transaction details will always be safely stored and kept immune to hacker attacks.

  • Broader adoption of crypto

The high volatility aspect of regular cryptocurrencies is one of the major barriers to wide-scale adoption of cryptocurrency. But, stablecoins, with their guarantee of lesser price volatility, are expected to inspire interest and adoption of crypto on a mass scale.

Different use cases of stablecoins

Investment medium

Stablecoins assure lower price volatility and more predictable returns compared to regular cryptocurrencies. As a result, they are fast becoming a favourite among smart investors that are looking for safer cryptos.

Payroll via smart contracts

Stablecoins can make use of smart contracts for facilitating seamless payment systems. Smart contracts can be defined as self-executing contracts developed on blockchain and do not need permission from a central authority for operation.

Let’s say, an employer wants to offer a salary in the form of stablecoins. He can opt to set a particular smart contract which will be designed to facilitate automatic transfer of payments to employees  at the beginning of every month.

Smarter alternative to cross-border money transfer

This is especially handy for hundreds and thousands of migrant workers who have to pay hefty fees while transferring money to family in other countries. The traditional money transfer process is not only costly but also slow. If they can use stablecoins instead, they will not only benefit from lower transfer fees but also almost immediate transfer.

Lending

Smart debt investors are increasingly taking to stablecoin lending as it offers excellent high-yield opportunities through double-digit rates of interest.

Donation aid during crisis

As stablecoins allow super-fast and highly affordable payment transfer across borders, these coins will be a handy help to send donation aid to crisis-hit areas almost immediately. The underlying blockchain technology of the coin also ensures complete traceability and transparency of the donation process.

These are just a few; the world is all geared up to witness many more use cases of stablecoins in near future.

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