We all know about the existence of stable coins in crypto but have you ever think what role it plays in the cryptocurrency world? This is what we will discuss in today's Article
What's a stable coin?
Stablecoins are a type of cryptocurrency designed to keep a stable value, usually by being tied to a traditional currency like the US dollar. Unlike other cryptocurrencies, which can change value a lot, stablecoins aim to stay steady.
Here is the list of most used stable coins in crypto space.
Top 4 Stablecoins holds the marketcap of $154 billion and USDT holds the most of it. Looking at the marketcap you can have an idea that how important these stable coins are for crypto space.
The Importance of Stablecoins
#Stablecoins are a very important part of Crypto. As the name suggests, they make the volatile world of cryptocurrency more stable. Stablecoins are not as volatile and their prices don’t change as much as other cryptocurrencies. This makes them a great choice for people who want to buy or trade in crypto without having to worry about the risks of price swings.
Lets discuss the impact and use case of stable coins.
Reducing Volatility & Easy Trading
stable coins makes trading so easy. If i take you back to 2016 or before there were not many stablecoins and traders had to keep their money in Bitcoin or other cryptos and it's always volatile. Now most of the traders or investors can buy cryptos with Stable coins before 2016 most of the coins were only in bitcoin pairs. it was being traded in BTC.
Imagine watching your money being volatile all the time because you have to keep it in Bitcoin to swap it with other tokens. The existence of stable coins removed this issue. Traders can keep their money in stables and there will be no changes in their cash.
Everyday Payments
Stablecoins can be used like regular money. You can pay for goods and services with them without worrying about their value dropping suddenly. This makes them great for everyday transactions.
Cross-Border Transactions
Sending money across countries can be slow and expensive with traditional banking. Stablecoins can make these transfers faster and cheaper, helping people and businesses send money globally more easily.
Stablecoins in DeFi
Stablecoins are also highly liquid, which means they are easy to trade for other cryptocurrencies.
In DeFi, stablecoins work as a bridge between cryptocurrencies and fiat currencies. They are stable assets that can be used to buy or sell other cryptocurrencies without changing their value.
Remittances
People working in foreign countries can send money back home using stablecoins. It’s faster and often cheaper than using traditional money transfer services.
Savings
In countries with unstable currencies, people can use stablecoins to protect their savings from losing value. It’s a way to hold money that won’t be affected by local economic issues. Stablecoins are internet dollars and dollar is always considered to be a safe heaven against weak currencies.
Stablecoins for Market Stability
Stablecoins help stabilize the cryptocurrency market in different ways
1. Providing Liquidity
They make it easier for people to buy and sell cryptocurrencies quickly, adding more money (liquidity) to the market. This can help smooth out price swings.
2. Safe Haven
When the market is volatile, investors can move their money into stablecoins to avoid losses. Like i discuss above stable coins made is so easy that when you think the prices can go down you can simply swap your holding into stable coins and avoid trading losses. I have seen that period where we were keeping BTC as a cash because most of the coins were only available to trade with BTC.
3. Facilitating Transactions
Stablecoins allow for faster and cheaper transactions compared to traditional financial systems, which can help keep the market active and efficient.
The Risk Of Holding Crypto Stable Coins
Everything comes up with a risk and stable coins can also be risky.
Stablecoins are backed/pegged by
Fiat currencies like the U.S. dollar or euro.
Crypto-collateralized stablecoins
These stablecoins are backed by other cryptocurrencies. Users deposit a certain amount of cryptocurrency as collateral, and stablecoins are issued in return. The amount of collateral required varies depending on the stablecoin
Algorithmic stablecoins
These stablecoins use algorithms to maintain their stability. Any asset does not back them but relies on supply and demand dynamics to maintain its price. The algorithms work by adjusting the supply of the stablecoin based on its price. If the price of the stablecoin is above the target price, the algorithm will increase the supply of the stablecoin, and if the price is below the target price, the algorithm will decrease the supply of the stablecoin.
If a stable coin is failed to provide any of these backup the value of stable coin will be collapsed and users can lose their funds.
It happens multiple times in the past most of you know about UST and Luna crash, UST was pegged with Luna and it ended with a huge crash and never recovered.
it happened in the past, it can happen again. Make sure you know each and every information while trading crypto.