Cryptocurrencies were created not only to store values but also as a novel method of exchange. However, due to their low market capitalization, even the most well-known cryptocurrency like Dogecoin is forced to bear the brunt of the widespread price inflation.
In terms of individual buy and sell orders, smaller market caps are like small ponds in that they are easy to manipulate and have sharp value fluctuations. The vastness of a larger market cap, on the other hand—similar to oceans—will be better able to withstand these changes. Due to their volatility, cryptocurrencies are difficult to mainstream as payment methods.
If the incentive system isn’t strong enough, there are a lot of things that make it hard for businesses to get and keep customers, so they have to get rid of incentives. For instance, it wouldn’t be necessary for leaders to be attacked to prevent them from developing new services; If these services were built entirely using cryptocurrency transactions or contracts that kept fees low because they were denominated in digital money (as much of Google was already done), then directly attacking leaders only serves to bolster their resistance.
At the point when Bitcoin or some other digital money is worth X on one day and a big part of that on another, involving it in day-to-day exchanges and trading can be troublesome.
How are stablecoins utilized?
A stablecoin is also known as “fiat currency” because its value is tied to the real world. For instance, the stablecoin Tether, or USDT, is expected to maintain its one-dollar value regardless of the situation.
Stablecoins were created to be used for quick and simple transactions, combining the convenience of cryptocurrencies with the stability of a fixed currency and the absence of regulations. Stablecoin, like all other coins, can be used primarily for everyday purchases. However, due to their lack of popularity, these coins are currently not accepted as payment.
What purposes do stablecoins fulfill?
There are numerous uses for stablecoins, some of which are as follows:
At the moment, stablecoins are mostly used on cryptocurrency exchanges.
Using stablecoins, traders can trade volatile cryptocurrencies for stable cryptocurrencies to lower their risk. If you have invested in Bitcoin but don’t want to risk the price of Bitcoin falling against the US dollar, you can, for instance, exchange your Bitcoins for USDT and keep your dollar value. When you want to “get back into the game” and hold Bitcoins, all you have to do is convert your USDT back into BTC. Crypto-only exchanges do not provide their customers with options like the ability to exchange bitcoins for fiat currencies because they adhere to the regulations. Consequently, this approach is widely used.
Because crypto transactions are quicker and less expensive than fiat transactions, stablecoins enable quick money transfers between exchanges. With the option for such a quick settlement between Bitcoin exchanges, arbitrage is made easier and the price gaps that typically exist between them are closed.
Stablecoins are more of a utility coin than a real exchange medium for traders; But how are stablecoins produced?
a wide range of stablecoins
There are several ways a company can try to keep its stablecoin pegged to a fiat currency, some of which are discussed below:
The first step in keeping a peg is trusting that the coin is worth what it is pegged to. For instance, if the market does not believe that one USDT is equivalent to one dollar, everyone will immediately liquidate all of their USDT, resulting in a significant price decrease.
To create a trust, the company uses coins backed by assets. This collateral demonstrates that the business honors its promises and that its coins should be worth the amount pegged.
Another illustration of collateral is the DGX token, which is said to be backed by gold. Another type is a collateralized stablecoin that is backed by one or more cryptocurrencies. This collateral form is simpler and easier to audit because the company’s balance can be viewed on the blockchain.
The second way to keep a peg is to manipulate the supply of coins on the market, also known as an algorithmic peg. An algorithmic peg is when a business creates a set of rules, also known as a smart contract, that alters the amount of a stablecoin in circulation in response to the price at which it is selling.
Let me explain. Consider a stablecoin that is algorithmically correlated with the US dollar. Is it possible to remove the peg? The peg might break if a lot of people start buying the coin. To stop this from happening, new coins are issued.
Due to this increased supply, there will be a demand to maintain the coin’s value, which will raise the price. However, if a large number of people start selling the coin, it is taken out of circulation to keep the price pegged to one US dollar.
To be clear, stablecoins that are algorithmically pegged do not have any assets as collateral. The smart contract in charge of managing the coin acts like a central bank, attempting to alter the amount of money available to bring the price back to the peg.