This article is written by one of our contributor Illiya Zaki.
Blockchain is disrupting many industries.
Among plenty of emerging use cases, the technology aims to create a new and improved payments system for the world — secure, transparent, decentralized, fast and low cost, utilizing cryptocurrencies (digital cash) as a means of exchange.
But the value of most cryptocurrencies, especially Bitcoin, fluctuates on a daily basis. Examples of difficulties to cope with this volatility is highlighted here. For asset-funds, hedging again Stablecoins is the only way to manage extreme price fluctuations.
Crypto investors have become millionaires overnight, only to lose much of their wealth just weeks later. While this can be exciting to witness, it also shows bitcoin’s massively unreliable nature — especially as a currency for goods and services.
This is where Stablecoins can change everything.
Stablecoins are cryptocurrencies with values pegged to assets such as the US dollar or gold. Stablecoins are a stable, scalable and secure means for transactions, aim to mimic traditional, stable currencies. A Stablecoin is a cryptocurrency that is pledged to the value of any underlying asset or commodity. Many Stablecoins are pegged at a 1:1 ratio with certain fiat currencies, such as the US dollar or the Euro, which can be traded on exchanges. Hence, Stablecoins are not subject to the extreme price volatility that other cryptocurrencies are affected by.
Real-world applications and benefits
Although still in its early stages, Stablecoins have many potential real-world uses. Here are just a few examples.
A day-to-day currency
Stablecoins could be used just like any other currency for commerce, with the added benefits of being a digital currency. Stablecoins are also especially beneficial for cross-border payments eliminating the need of conversion of different fiat currencies, and instant transaction.
Recurring and P2P payments
Stablecoins also allow the use of smart financial contracts that can be enforceable over time. Smart contracts are self-executing contracts that exist on a blockchain network, without requiring any third party or central authority to control or manage it. These autonomous and automatic transactions are traceable, transparent, and irreversible, making them ideal for salary and loan payments, tax and rent payments, and subscriptions.
Stablecoins have the potential to change millions of families’ lives in developing countries. Migrant workers have to send remittances through businesses like Western Union to get money back to their families and loved ones. This is a slow and costly process, where families end up losing a big chunk of their funds to high fees.
Protection from local currency crashes
In the event of a fiat currency crashing in value, local citizens could exchange their crashing currency for USD-backed, EUR- backed, or even gold-backed Stablecoins quickly before they lose their savings due to hyper-inflation.
Improved cryptocurrency trading
Very few cryptocurrency exchanges out there currently support fiat currencies due to strict regulations. But the use of Stablecoins allows exchanges to get around this problem by offering fiat-or gold backed cryptocurrency trading pairs.
No centralized database management of crypto-asset records
All chain of custody information is fully managed by the blockchain. This blockchain ledger is immutable with data upload taking significantly less time than on the Bitcoin blockchain. All data is recorded on the blockchain and exists indefinitely. Every proof generated can be verified and are admissible in a court of law in the applicable jurisdiction.
Users will be able to manager Stablecoins by downloading wallets for desktop or mobile, or access wallet websites anywhere with internet connection.
A Dapp can provide crowdfunding opportunities with crypto-currencies and crypto-assets, or offer convertibility of cryptocurrencies to Stablecoins as a hedge to price volatility. In fact, many ICOs collected millions worth of ETH and BTC which dropped 85% in value over the last 8 months.
When exchanges integrate Stablecoins as a cryptocurrency pair, they will be able to offer a gold or fiat hedge to cryptocurrencies as part of their service offering. Wealth management services and crypto-asset funds can adjust (hedges) their cryptocurrency portfolios against Stablecoins to manage an individual’s crypto financial risk profile and volatility.
Lending and Microfinance
Dapps can utilize Stablecoins for peer to peer lending. A borrower can call for funding through a lending DApp based on his risk profile and reputation and negotiate a rate of return on the borrowed funds. Interest payments can be serviced at regular intervals with a penalty system in place for late payments. This has already been done with bitcoin, but due to the price volatility of cryptocurrencies, lenders may lose more of their asset value than what can be earned from the interest during the period of the loan.
Withdraws are possible on supporting exchanges, fast and liquid. Another possibility is to withdraw physical gold from gold-backed Stablecoins from partners or gold-traders worldwide.
Do we need Stablecoins?
Bitcoin is the King of Cryptocurrencies and most altcoins are tied to its volatility. Bitcoin, however, is tied to currencies such as USD or EUR. Stablecoins are, simply put, currencies or assets on the blockchain- harnessing the benefits of cryptocurrencies without its volatile nature.
Some people think stablecoins are no different than fiat currencies as both are digitalized already. Currently, stablecoins are only useful for crypto-trading to hedge against volatility. But is there truly a need for them? We can argue that blockchain address transparency issues with fiat transactions but do we really want our transactions to be public?
Ultimately, it is up to the consumer. Having an alternative can surely be good. 🙂
Thank you for your time!