What are stablecoins, their significance and benefits, why use them for global payments?
Blockchain technology took over the world by storm. It has revolutionized the financial market bringing in a new mode of payment that breaks the barriers of government regulations and interference from financial institutions. These blockchain networks are fueled by cryptocurrencies or digital currencies.
Cryptocurrencies like Bitcoin, Ethereum, or Litecoin are electronic cash that is decentralized, fast, transparent, secure, cheap, and are not regulated by any central authority. Digital transactions by cryptocurrencies are peer-to-peer encrypted, do not disclose the identity of the users, and can be conducted from anywhere in the world. Many employers and businesses have adopted a crypto-powered payroll system to pay salaries to their employees through the use of secure wallets. However, one of the greatest challenges of adopting cryptocurrency is the volatility of the market.
The price of virtual currencies like Bitcoin or Ether fluctuates regularly and is a major setback for online payments. This is where the role of stablecoins comes in. Stablecoins are intended to bring stability to cryptocurrencies and ensure ‘risk-free’ transactions.
Here in this article, we will get a clear understanding of Stablecoin and how it can be used to pay employees and vendors.
What is a Stablecoin?
Stablecoins are cryptocurrencies that are pegged to a digital asset like cryptocurrency (bitcoin, ether) or a fiat currency (USD, EUR). They can also be pegged to commodities or precious metals like gold or silver. A stablecoin can be collateralized to a fiat currency like a US dollar in a 1:1 ratio. This means, that for every 1 stablecoin, you will get $1 which can be redeemed any time you want.
The emergence of the first stablecoin dates back to 2014. In July 2014, BitShares Blockchain released the first stablecoin (crypto-collateralized). So far, the Ethereum network has been the most favored blockchain to launch stablecoins. Tether USDT is one of the most popular stablecoins and still manages to hold its place.
Facebook-backed cryptocurrency Libra is anticipated to launch its first stablecoin ‘Diem USD’ in 2021. Other stablecoins include Tezos (USDT), Gemini Dollar, Binance USD, USD Coin, etc. Looking to buy stablecoins? Check XanPool.
Stablecoin witnessed unprecedented growth in 2017-2018 after the sudden fall in the value of Bitcoins which was by almost 50%. Cryptocurrencies no matter how popular and convenient may seem are susceptible to market volatility. The crypto market is unpredictable and the sudden rise and fall in prices make crypto trading risky. This is a reason why many still do not want to venture into the market.
Price fluctuations hinder normal trading and business services like issuing loans, mortgages, and the payment of salaries to employees. Stablecoins assesses this fluctuation between the demand and supply of cryptocurrencies through decentralized algorithms and maintains a balance.
The global stablecoin market supply is expected to reach $100 billion by the end of 2021. Stablecoins have leveraged the benefits of decentralized finance and are a cheap and fast option for international payments across the globe.
Stablecoins for Global Payments
Today the crypto economy is evolving making way for new business solutions and technologies. Many businesses are adopting crypto-enabled payment options to pay their employees and vendors. Stablecoin has made that possible and emerged as a global currency even at remote places or underbanked communities.
Stablecoins simplify the borderless settlement of payments. Today companies have several offices located in different parts of the globe. Stablecoin ensures seamless cross-border transfer of funds. The transactions are transparent, fast, and secure and there is no hindrance from intermediaries like banks or financial institutions.
All transactions are end-to-end encrypted and secured by crypto wallets which minimizes the risks of losing funds.
Very helpful in sending funds to remote places where there is no access to a physical bank. Employers paying salaries need not worry about the fluctuations in the price of cryptocurrencies. The processing fees are also low especially for international payments.
An affordable and easy option for the transfer of funds to migrant workers and their families is through e-wallets.
Transactions are transparent and irreversible and there are no hidden charges.
Stablecoin is a global currency that can be used for making payments anywhere in the world. Recipients can convert them into their local currency any time they want.
Stablecoins leverages the lending process which was otherwise difficult because of the volatility of cryptocurrencies. Returns on crypto lending are also comparatively high.
Stablecoins operate beyond bank hours. They operate 24/7. So, you do not have to wait for your payments.
Stablecoins also have a great future in the real estate business. Collateralized stable coins can be used for investing in real estate and thus have opened up new opportunities even for small-time investors.
The benefits of Stablecoins are far-reaching and are cost-effective solutions for digital payments. These coins can be collateralized which minimizes the risks of losing funds due to price fluctuations of cryptocurrencies. However, stablecoins have a long way to go. The market is still young and there are a lot of risks for fiat-backed stablecoins. The absence of proper audit or regulation often discourages traders to trust and invest in the exchange.
So, are stablecoins the future of DeFi platforms? The future seems promising for stablecoins especially with new cryptocurrencies making their entry into the market. However, large-scale adoption of stablecoins by centralized financial institutions may gear up widespread use of stablecoins.