Stablecoin is slowly gaining popularity in the crypto market. Certainly, it is yet to gain the fame of Bitcoin (BTC) and Ethereum (ETH) because very few people know about this currency in detail. Even then, it is slowly catching up as more investors are watching its progression. Recently, crypto exchanges reported that Stablecoins are booming on their platforms and are one of the most traded assets.
Even USD Tether, another Stablecoin with backing from fiat currency assets has rapidly gained popularity over the past few months. So what exactly is Stablecoin and is it entirely free from the volatility that is an important part of other popular cryptocurrencies like Bitcoin, Ethereum, Ripple (XRP), and Litecoin (LTC)?
Stablecoins Are Price Stable Digital Currencies
In general terms, Stablecoins are defined as cryptocurrencies having a stable price. Most of the stablecoins are pegged against the USD however some of them are also pegged against index such as CPI (consumer price index) to ensure that these digital currencies remain free from fiat liabilities in the coming future. Bitcoin and Ethereum are volatile cryptocurrencies and have posed a big problem for its users which are the prime reason merchants are going away from it. Also, the transaction fees of the cryptocurrency exchanges have been increasing which is also turning off the users.
So, is Stablecoin the right alternative to these volatile virtual currencies? Can it replace Bitcoin and Ethereum in the coming days?
Stability Offered By Stablecoins Is Elusive?
Stablecoins achieve price stability by pegging their own prices to USD or similar stable assets. However, past experiences show that currency pegs can break leading to wide-spread catastrophe. The 1994 Mexican peso crisis, 1997 Asian financial crisis, 1998 Russian financial crisis, and great depression in Argentina is an indication of that. So, it means that pegging cryptocurrencies do not guarantee stability. Rather it is dangerous. It also means that the stability that Stablecoin offers is elusive and cannot be completely true.
Stablecoins are just a digital representation of valuable commodities or fiat currencies similar to gold and have some weaknesses which are not easily visible. The process requires frequent professional audits for proving collateral as these real-world assets are not visible on the blockchain. This challenges the transparency in the Stablecoin dealing which can make an investment in this token a lot scarier.