Stablecoins Fuel the Adoption of Cryptocurrencies

[TR; DR]

Stablecoins result in increasing use of digital assets.

Traditional collateral, cryptocurrency collateral, commodity backed stablecoins and algorithmic stablecoins are the major types of stablecoins.

Many people value stablecoins as they are a medium of exchange and a store of value.

At Gate.io, people can invest in liquidity provision, crypto lending and “ Hold and Earn” products.

Keywords: stablecoins, cryptocurrency, traditional collateral, commodity backed stablecoins, algorithmic stablecoins, investment opportunities

Stablecoins are playing a critical role in increasing the use and adoption of cryptocurrencies and other digital assets. Simply defined, a stablecoin is a type of a cryptocurrency whose value is pegged against an asset or fiat currency. Probably, you are conversant with Tether USDT, which is a cryptocurrency pegged against the United States dollar. Nevertheless, this is not the only stablecoin because there are dozens of them. The basic fact is that stablecoins hold their values constant over a fairly long period.

As a fact, people can peg cryptocurrencies against any other fiat currency of choice, not just the United States of America dollar. They can peg them against Euro, Pound, Yen or any other currency. In addition, people can peg their cryptocurrencies to other assets other than fiat currencies. For now, let’s focus on the different types of stablecoins.

Types of stablecoins

The price of stablecoins depends on the values of underlying assets which can be precious minerals or even other cryptocurrencies.

Traditional collateral: This is a stablecoin which is backed by fiat currency such as the United States dollar, Pound or Euro in a 1:1 ratio. In this case, there is a reserve of the fiat currency in a financial institution which is proportional to the quantity of the stablecoins in circulation. For example, 20 000 USD-backed stablecoins in circulation require a reserve of $20 000. The examples of fiat-backed stable coins are Tether USDT, TUSD and GUSD. People normally refer to these stablecoins as off-chain assets since fiat currencies do not exist on the blockchain.

Cryptocurrency collateral

In some cases, legacy cryptocurrencies back up stablecoins. This does not sound usual since most cryptocurrencies are volatile. However, the logic is that some cryptocurrencies are more stable than others. The only way to back one cryptocurrency by another is through using a smart contract. Basically, cryptocurrency of an equal value should be locked in a smart contract in order to create crypto-collateralized stablecoins.

Commodity backed stablecoins

These are stablecoins whose collaterals are commodities or physical assets such as precious minerals and real-estate. Gold and oil are examples of minerals which people can use as collateral for stablecoins. As a result, the prices of the stablecoins fluctuate in relation to the change in the values of the underlying assets. This also gives many people around the world the chance to invest in the assets which back up the stablecoins, such as gold.


Algorithmic stablecoins

These stablecoins do not have any assets or fiat currencies that back them. Instead, there are specialised algorithms which control the supply of the cryptocurrency in order to maintain a stable value over a long period. For example, when the market price falls, the algorithmic system reduces the supply of the stablecoins in order to maintain an almost constant value. In contrast, if the price of the stablecoin rises, the system increases the supply of the cryptocurrency, thereby maintaining the stable value.

The contribution of stablecoins in the crypto sector

Stablecoins are less volatile than non-pegged cryptocurrencies, resulting in many people willing to buy, hold and transact with them. Despite this essential attribute, stablecoins maintain the powerful properties of cryptocurrencies such as secure and cheap to transfer. Also, people around the globe can easily access them at any time, making them a convenient means of payment.

Probably the most important advantage of stablecoins is that people can use them as medium of exchange owing to their stable values. As a result of their small price increases they attain utility which legacy cryptocurrencies do not have. With this in mind, stablecoins are a suitable store of value as well as medium of exchange.


In addition, stablecoins enable the integration of decentralized finance (DeFI) and the traditional financial market. This means that people can access many services which exist in the legacy financial system such as lending, borrowing and insurance, among others. Thus, stablecoins result in greater adoption of cryptocurrencies than otherwise.

Risks of stablecoins

Despite their immense contribution to the digital economy, stablecoins have risks as well.

Security: Stablecoins face similar security issues which non-pegged cryptocurrencies have. This is because people still store them in digital wallets or on exchanges. Therefore, if there is a security breach such as hacking, people lose them in a similar manner as other digital assets.

Counterparty risk: The value of the stablecoins remain constant only if other involved parties carry out their responsibilities in the best way possible. Examples of the third parties are the banks which store the fiat reserves and the organizations which develop the stablecoins.If they fail to carry their mandate as expected, the stablecoins will not maintain constant values.

Investment opportunities

There are different investment products involving stablecoins. Interestingly Gate.io has many such products.

First, there is the “Hold and Earn” product, where investors can hold their stablecoins such as USDT and earn interest. For example, people who hold their USDT coins earn 4% per annum.
The other product is “Crypto Lending,” where individuals can lend out their cryptocurrencies, including stablecoins and earn interest. Once again, individuals can lend out USDT for at least 10 days and earn interest. Nevertheless, the minimum lending amount is 100 USDT.

There is also “Crypto Loan,” a product which allows people to borrow cryptocurrencies such as USDT for a period of 10 days. This means that individuals with emergencies can get some funds to solve their pressing needs. People can also borrow other stablecoins such as GateUSD (USDG) and USDC.
Another great product which Gate.io offers is liquidity mining. In this case, investors can contribute two tokens of equal value to different pools. Some of these pools include stablecoins such as STRP/USDT and DAL/USD pairs.

Conclusion

From this discussion, it is evident that stablecoins bring great value to the crypto ecosystem as they lead to new investment opportunities. Also, people can easily use stablecoins as a store of value and medium of exchange due to their constant prices. Investors who want to invest in stablecoins should look no further than Gate.io, which has different trending products such as crypto loans.

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Author: Mashell. C, Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.


Reference
Digital money for everyday use
What are stablecoins
Stablecoins and the Congress
Stablecoins- Coinbase