Stablecoin: Should you really treat stablecoin like a traditional cryptocurrency?

The growing demand for cryptocurrency and the growing use cases that investors have noticed have compelled many of us to invest in digital assets. The strong returns seen by currencies like bitcoin and other cryptocurrencies in recent years have inflated demand, making the market all the more volatile. In such a market, how to reduce the risk and maximize their return? This is when stablecoins come into the picture.

Stablecoins, in simple terms, are cryptocurrencies with very little volatility and price stability, as they are backed by liquidity and cash assets, keeping their prices predictable with minimal risk. Since the possibility of a cryptocurrency going from a million dollars to insignificance is a possibility in a very short period of time, stablecoins are used to cover the bridges between fiat and crypto for payments, loans, exchanges and alternative banking transactions.

However, currencies such as bitcoin and ethereum are very volatile as they rise and fall erratically. This is something that stablecoins eliminate. But given its nature of being backed by fiat itself, this raises the question of whether a stablecoin is indeed a cryptocurrency or a digitized version of fiat currency. Your guess here is probably the same as ours. Stablecoins sit in the gray area, drawing similarities from both worlds.

Fiat-backed stablecoins are constrained by all the regulations that come with fiat currency, compromising the efficiency of the conversion process and the potential effectiveness of the digital asset itself. For example, Facebook’s Libra currency promised a stablecoin backed by a basket of global fiat currencies, broadening the coin’s appeal and utility. However, it received so much regulatory backlash that project management had to abandon it. To this day, the network is still struggling to get regulators to sanction its own stablecoin. Not only that, but all stablecoins require third-party regulations, which makes them very difficult to join the true decentralization movement.

Stablecoins are useful because they make it easier for users to transact in cryptocurrencies. They provide a link between volatile cryptocurrencies and real-world assets such as fiat currency. By trading stablecoins instead of US dollars, you can keep all your transactions on crypto exchanges while avoiding the fees charged by many exchanges and maintaining transaction anonymity. Stablecoins are used as a bridge between cryptos that run on different networks without a user needing to fall back on fiat currency for conversion.

Although stablecoins are excellent intermediaries for the decentralization movement, this might not be enough for them to be accepted into the family of traditional cryptocurrencies, as their value is derived from fiat currency, commodities , other cryptocurrencies and/or algorithms. What started as a way to reduce the volatility that cryptos carry has become support for decentralization. Missing out on the whole independence aspect, the point of having a cryptocurrency is lost when it is backed by fiat currency.

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