Is Stablecoin the Future?

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25 Jan 2022
6 min read

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Most cryptocurrencies were created as a medium of exchange and not just to store value due to their relatively small market capitalization. Cryptos experience high fluctuations in their value. It is where a stablecoin comes in. It is an attempt to create crypto that isn’t volatile. So, you've got a sense of what you'll get from this article. Put on your reading glasses and uncover some important insights on stablecoin. #TWN

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What is Stablecoin?

As the name suggests, stablecoin is an attempt to create a cryptocurrency that does not face high fluctuations in its value by pegging itself to a reserve asset like the U.S. dollar or gold. Hence, ensuring the value of the coin is as stable as the asset it has been pegged to. Cryptocurrencies such as Bitcoin, Ethereum, Dogecoin, etc., are all unpegged, and hence, they face a lot of volatility. Therefore they cannot be used as a payment method in most businesses because of their unstable nature.

We already have a few stablecoins in the market like TerraUSD(UST), Binance USD(BUSD), USD Coin(USDC), etc. However, these coins are not very popular at the moment. No one accepts them as a way of payment. Hence, they mostly get used as a crypto exchange.

PayPal Stablecoin

PayPal has indicated to be interested in exploring the idea of launching its very own stablecoin. A cryptocurrency pegged to a fixed asset like gold, silver, USD, etc. The indication was made after developer Steve Moser discovered references to something called “PayPal Coin” within the company’s IOS app. According to Bloomberg’s report, PayPal senior vice president of crypto and digital currency has confirmed the finding.

The company seems to be currently exploring the possibilities, whether to move forward with the finding or not.

Looking at the popularity of Bitcoin, if a company like PayPal steps into the game, it could be a revolution for the industry and will definitely open up a lot of opportunities for the market. The company's current support of the cryptocurrency is limited to very few currencies, namely Bitcoin, BitcoinCash, Litecoin, and Ether. But, according to Moser, PayPal is working to support the Neo cryptocurrency, apart from exploring the possibilities of launching its own stablecoin.

PayPal has around 375 million daily users and over 30 million merchants on the platform. PayPal does not charge any amount to its user for holding transactions or currency conversions.

Advantages of Stablecoin

  • Stablecoin protects Traders and Investors during volatile markets. In a bear market, traders can protect their position by exchanging their crypto with a stablecoin. Traders can also manage their crypto holdings by entering or exiting the market using stablecoins without converting them to fiat currency. Also, not all cryptocurrency exchanges support the use of fiat currencies, leaving stablecoins as the only solution.
  • They make the crypto market efficient as stable coin market capitalization has increased lately, so also has their liquidity. It leads to more accurate asset pricing resulting in fair asset prices and tighter bid and asks spreads. 
  • Cross-border transactions with stablecoin are faster, cheaper, and more efficient than traditional swift or western union methods.
  • Stablecions are not subject to localized laws. Hence, they can act as an alternate digital currency where economic uncertainty is a concern.

Stablecoin Drawbacks

  • Stablecoins are not necessarily stable; one example is tether: it has consistently stated that it is one hundred percent backed by the U.S. Dollar, but when tether released a breakdown of its reserves in May 2021, it turned out that less than 3% of tethers were actually backed by the U.S. Dollar.
  • These coins are not supported by most of the federal banks. Hence adverse regulations can risk investments.
  • Stablecoins may hurt crypto markets. When large whales move down the markets, they can secure a significant blow to the price of cryptocurrencies while securing themselves to stablecoins.
  • Stablecoins may not give excellent returns compared to their crypto peers. For example, the USD coin has been consistently priced around one dollar. Meanwhile, at the start of 2019, bitcoins' value was close to four thousand dollars but, in May 2021, it was over sixty thousand dollars.

Future of Stablecoin 

Investors are increasingly looking to stablecoins as a safer way to experiment with the crypto market. At least 200 stablecoins have been released or are in development globally. Additionally, two united states dollars backed stable coins, the Paxos Standard and Gemini dollar, have been approved and regulated by the New York state department of financial services. Financial services incumbents are also eyeing the opportunity. For example, J.P. Morgan has piloted and launched its stable coin. Meanwhile, a recent survey of central banks found that two-thirds of respondents are researching the potential impact of stablecoin on financial stability in certain countries like Brazil. People prefer stablecoin to their national currencies during uncertain economic conditions. Stablecoins have the potential to open new ways to the mainstream adoption of digital assets in day-to-day life. Though they have a huge potential in changing the global payment landscape, stablecoins are still in their pupilage. It may take a while before we see them turning into a true alternative to fiat currency.

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