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The reason why the first cryptocurrency, Bitcoin, came into existence is that, from transactions, it eliminates the need for middlemen, reduces transaction costs and time, and provides users with greater accessibility/. However, there was the issue of price volatility. This difficulty undermined the adaptability and dependability of Bitcoin, particularly as a medium of trade. As a result, it prompted the rise of rival cryptocurrencies like Ethereum and Stellar. Stablecoin development is born as a result of this, and they have since become one of the most well-known breakthroughs in the cryptocurrency development field as a solid currency. So, what exactly is a stablecoin? Let's take a closer look.
Understanding Stablecoin Development
Stablecoins were designed to be used in the same way that every other cryptocurrency is: as a simple, scalable, and secure form of payment. But, as the name suggests, stablecoins are “stable.” This means that the market price of a stablecoin is pegged to the value of another stable real-world asset, such as the US dollar.
Any investor or company would not want to be put in jeopardy due to unneeded risks. That is why, even though cryptocurrencies, particularly Bitcoins, are extremely popular, some investors and businesses remain hesitant to be connected with them. With Bitcoin's price shifting every day, a price-stable cryptocurrency became a necessity for consumers looking to avoid the local banking system and failing economy while conducting commerce securely and smoothly. As a result, stablecoin development began to gather traction and is now seen as the crypto sphere holy grail, a long-held ambition.
If you're interested in stablecoin development, let's first define price-stable and how an asset is considered price-stable before moving on to the development.
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What Makes a Stablecoin Stable?
Stablecoins are essentially identical to twentieth-century US Dollars but in digital form. At the time, the gold standard was still in place, with each dollar tethered to a certain amount of gold to ensure price stability.
In the same way, a stablecoin works. To reduce price volatility, they are tied to a more stable real-world asset like fiat currency, real estate, precious metals, and so forth.
Simply said, an ideal stablecoin has characteristics such as the ability to withstand extreme market volatility, be cost-effective to operate, have easy-to-understand stability metrics, and provide better transparency to consumers. Stablecoins have these characteristics, which make them more ‘stable' than other currencies.
Stablecoin development comes in a variety of shapes and sizes in the crypto world. Here's a basic rundown of them.
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A Variety of Types Stablecoins
Collateral Stablecoins
Collateralized stablecoins have their values fixed or supported by something else. They are further divided into the following categories:
Fiat Currency backed Stablecoins
Such stablecoins are backed by fiat currencies. Tether is one of the first and most popular fiat-backed stablecoins ( USDT). Tether introduced the notion of a cryptocurrency backed by reserves representing the whole market capitalization and tied to the value of a US Dollar.
Asset-backed Stablecoins
A stablecoins backed by an underlying real-world asset is known as asset-backed stablecoins. Apart from fiat money and cryptocurrencies, they are also supported by a variety of assets. Digix, for example, is a cryptocurrency whose value is tied to, or backed by, the price of gold.
Stablecoins backed by cryptocurrency
These stablecoins are backed by cryptocurrencies, but particular protocols are utilized to ensure that the value does not fluctuate with the price of the backed token. The DAI token, for example, is backed by Ether and pegged to the US dollar. The Maker Smart Contract keeps DAI's price stable by creating and destroying MKR tokens in reaction to ETH price variations.
Stablecoins without collateral
Stablecoins that are not backed by or collateralized by anything are known as non-collateralized stablecoins or algorithmic stablecoins. This may appear to be at odds with the concept of stablecoins we've been discussing, but to clarify, the US dollar used to be backed by the price of gold, but that practice was discontinued decades ago.
They are, nonetheless, fully stable since people believe in their worth. non-collateralized stablecoins follow the same logic. The supply of stablecoins is controlled using an algorithmic technique in these types of stablecoins. They are the most decentralized and independent kind of stablecoins, with no central authority.
Stablecoins that are hybrids
Hybrid stablecoins combine the greatest features of the two types of stablecoins listed above. They are linked to an asset, but they are also algorithmically modeled.
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What is the Purpose of Stablecoins? What Are the Main Advantages Involved?
Improved value storage
Stablecoins are a significantly superior store of value than Bitcoin or any other cryptocurrency. Stablecoins, unlike any other cryptocurrency, are not subject to speculative markets or uncontrolled inflations.
Transactions that are completed quickly
Because stablecoins are backed by blockchain, which operates independently of a central institution, they can be used at any time of day. Stablecoins are built on a well-designed smart contract escrow mechanism that speeds up, secures, and streamlines transactions, settlements, and other financial activities.
Fees that are reduced
Stablecoins remove the costs associated with traditional payment methods, such as credit card payments, and allow for low-cost transactions that benefit both users and businesses.
Transparency
Stablecoins provide complete transparency into the transaction process and are backed by regular audits. Furthermore, because they are built on blockchain, anyone with an internet connection to the network can see transaction data via blockchain explorer.
Programmability
Because stablecoins operate on smart contract codes, they are highly programmable. It means that any new feature may be added in response to changing market conditions. Loyalty schemes, for example, can be implemented into stablecoins, enhancing the user experience.
Stability
The most significant advantage is, of course, steadiness. Because they are backed by a real-world asset, stablecoins are unaffected by cryptocurrency price volatility.
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Is Stablecoin the Next Big Thing?
Stablecoins, according to experts in the crypto sphere, will be an indispensable element of the crypto industry's future. The growth of stablecoins has been paved over the last few years. Fiat-collateralized stablecoins are the result of a demand for a more stable medium of exchange.
However, there are still certain issues about stablecoins, such as rigorous restrictions, transparency, centralization, and so on. With the increasing trends, many institutions are aiming to make it better with their stablecoin introduction.
Connect with our seasoned specialists from Oodles to learn more about stablecoin, the development process, price, or anything else you need to know.
