It is not difficult to see that the volatility in the price of cryptocurrencies has led the market to stop trusting them as means of exchange. This is one of the main points in the search for the massive adoption of this new technology, so it is imperative to find a solution that allows people to use digital currencies for what they were intended.
This has led to a series of projects known as stablecoins, or stable currencies, which get to stabilize the price of coins from different inputs while maintaining those qualities of technology that makes them so interesting. In this Stablecoins review we are not only going to concentrate on learning what these particular types of currencies are, but we are also going to see examples and how to eliminate the volatility that damages the future of this sector so much. Undoubtedly, this is a very interesting topic to learn.
What are Stablecoins?
Each platform implements the mechanism that, as it believed, most propitious to achieve the stability of the price of its currency. Many of them, for example, link the value of these to a fiat currency such as the dollar. But the important thing of all this is that whether it is a solution that uses a proprietary algorithm that adjusts the money supply according to the price, that the cryptocurrencies are backed 1: 1 with some asset or it is a decentralized organization, This type of project has been growing in the industry the last time. What is sought is to get a stable currency while retaining the decentralized character, two condiments that are not easy to obtain in the same mixture. The most known cryptocurrency of these is Tether, which at the time of writing is the fifth cryptocurrency with the highest market capitalization. This uses the support with fiat currency, which ends up taking it to the centralization and scrutiny of the community in search of determining if it really has the amount of money that its value, more than $ 1.8 billion. Other very promising projects have been presented, all with different ways of achieving the same. However, until now, there is no solution that is not only widely accepted by the community, but also functional, safe and decentralized enough for the standards of this industry.
The importance of the Stablecoins
This type of cryptocurrency is of enormous importance and should not be overestimated, as they are considered by many as a crucial element for the industry. We talk about numerous reasons that go from the current market conditions to how the industry will evolve over time. Particularly, the eye is placed on stability, and this implies two essential components to understand it. On the one hand we have stability in the short term for transactions, and on the other, stability in the long term for investors.
When a bear market occurs as we have experienced throughout this 2018, investors seek more stable value shelters to keep their funds safe while prices fluctuate and thus avoid large losses. Because it is not so simple for average investors to convert fiduciary money to cryptocurrency and vice versa, besides it is not cheap, having a stable cryptocurrency where they can take refuge is a great way to mitigate losses during this type of movement.
Even for traders, who keep their money in the exchanges in search of very short periods of time, the possibility of entering and leaving while their money is not affected by the fluctuations is a great advance, especially during the hours that you are far away of the computer. Most digital currencies today are related in pairs with the Bitcoin or Ethereum, so when the market is not in the mood, neither are the prices of these, and a refuge of value as this type of currency is a great tool for them.
Another aspect that tells us about the importance of the stablecoins lies in the solution they provide in the short term to transactions. One of the objectives of Bitcoin is to function as a digital currency, where people can use it to pay for everything they consume on a daily basis by paying with a fiduciary currency. The examples that are usually given in this regard is typical of buying a cup of coffee or a pizza, so it is urgent to pay fast enough for these products to deliver everything we want from them. Therefore, the speed with which the transaction travels from our purse to the rest of the network is very important.
Unfortunately, both the scarce speed with which the Bitcoin network does it and the commissions we have to pay, make it quite difficult to use. In simple words, we can say that it is not efficient or convincing enough so that a person far from the technological world can put aside all these negative aspects and make use of it. This has to be added the problem of volatility, which makes even less desirable to these cryptocurrencies, both for the buyer and the seller. A problem within the industry that is well known and that many projects try to placate using different technologies, even without finding the definitive one.
Despite being a controversial issue, what is not in this subject? The Stablecoins maintain the interest of creating a stable cryptocurrency solution that is functional and decentralized. Some projects seem to be impossible to perform if they are not tied to a third party, which ends up making them more centralized.
Other projects seek to offer new solutions to the fundamental problem of the market and allow people to take refuge. If successful, surely we will see a great adoption of the users that demand a lower volatility for the daily use that they seek to give to these. There is a cluster of people who hesitate to switch to cryptocurrencies from traditional fiat currencies because they do not understand them, or if they do, they are afraid of their enormous volatility.
If Stablecoins are able to close the gap that exists, it will open the doors to an unrepeatable opportunity for a large-scale adoption and a more stable model. We cannot know if finally these will be those that offer a solution to the problem or if a new idea will emerge in its place. What is certain, in the long run this will be very beneficial for everyone.