Stablecoins serve as an important link between crypto and traditional finance, making them different from just another cryptocurrency cards. They address volatility by providing stability, accessibility, and programmability. It will not take much time for stablecoins to become a key component of the global financial system. Soon they will be in a position where they will drive a new era of borderless, digital currency as the market develops and regulations evolves
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Volatility is not new to the crypto market. Prices often surge to unimaginable heights within an hour and may collapse just as quickly. This can be seen as an attractive opportunity for traders who want to make more money. However, it acts as a curse for businesses and individuals who rely on crypto for their daily transactions. Volatility creates uncertainty and limits crypto usage in real-world transactions. 
This is where stablecoins come into the picture. They are designed to deliver the best benefits of blockchain while keeping the stability of traditional money.
What are stablecoins?
Stablecoins can be classified as digital currencies whose value is pegged to fiat currencies like US Dollar, Euro, etc. or with commodities like gold. Their aim is to reduce fluctuation in price. By doing so they offer consumers a trustworthy way to trade and keep money in the digital economy.
Stablecoins were created to blend the stability of fiat with the efficiency of crypto. Unlike other cryptocurrencies, which are affected by market volatility, stablecoins reduce users’ risk. This balance within the stablecoin’s structure has made them one of the most traded crypto categories.
How do stablecoins work?
Stablecoins work on multiple mechanisms to preserve their price. Let us understand a few of them to get a clearer picture.
Stablecoins pegged with fiat currencies – Some stablecoins are backed by reserves of fiat currencies like US Dollars or Euro etc.. These currencies are either held in bank accounts or held with custodial institutions. For every stablecoin like USDT, USDC, USD1, etc. there is a similar amount of fiat kept in reserve.
Stablecoin backed by cryptocurrencies – Stablecoins like DAI do not use fiat as their backup. They use other cryptos like Ethereum for security. Now, crypto is volatile, so to make sure that stability remains intact, these systems over-collateralize against backup.
Algorithm-based stablecoins – These can be categorized as the most innovative way of backup. Why? Because they do not have any physical reserve behind them. They rely on algorithms or smart contracts that maintain the peg by automatically adjusting supply. Now, this system, although advanced, faces a lot of issues – we all saw and remember TerraUSD (UST) and its collapse.
Why are stablecoins important?
Stablecoins are now a much-needed feature in traditional financial markets and in the world of cryptocurrency – they provide real world solutions and serve as a medium of exchange. They eliminate the holdups and costs of traditional banking transactions and make rapid, inexpensive worldwide digital payments possible.
Very often stablecoins are considered to be a ‘safer bet’ that can be held instead of digital assets in periods of volatility. They permit traders to get in and out of positions without dealing with the headache of converting. Therefore -making it a trusted ‘base currency’. In those inflation affected areas, stablecoins can serve as a digital option for global connectivity.
What is the difference between stablecoins and digital currency?
At first glance, there seems to be no difference between stablecoins and digital fiat money, however, they are significantly different. Stablecoins can be accessible globally anytime. They do not require any bank account or mediators. Also, most of the stablecoin issuers keep getting their reserves audited from time to time. In short, on one hand, fiat stays under control of the central banks, stablecoins are borderless and efficient.
The stablecoin sector is expanding. They are no longer dependent upon the US Dollar to prove their worth. The market is diversifying with coins backed by Euro, Pound, or commodities like gold. Even governments are showing their interest in them with CBDC exploring the same grounds. With growing adoption, stablecoins may serve as the foundation of digital payments in both mainstream finance and crypto.
