Are Stablecoin a route towards a Stable payment infrastructure?

The world is ushering towards a new Digital age where Digital Assets will hold as much importance and relevance as physical assets. The popularity of Cryptocurrencies is rising at a constant pace and millions of individuals have shown interest in trading or investing in Cryptocurrencies, but many people still show their reluctance in investing because of the volatility of the Prices of Cryptocurrencies. Bitcoin, the most popular Cryptocurrency recorded a Volatility rate of approximately 4% in the month of January, this year. The solution to avert the problem of volatility of Cryptocurrencies is Stablecoins.

What is a Stablecoin?

A Stablecoin is a digital currency that is pegged or attached to a reserve asset, making it a Tokenized version of the asset it is pegged to. The Asset the stablecoin is attached to could be in the form of a Fiat currency, a commodity like Real Estate, Gold, Silver, or even other Cryptocurrencies. This pegging of the Stablecoin to a reserve asset helps with bringing stability to the value of the Cryptocurrency. For all matters and purposes, a $1 Stablecoin is worth $1, and it also lets the investors to sit on the sidelines and hold on to an asset, the price of which is stable, hence significantly bringing down the volatility of the Cryptocurrency.

As they are tokenized versions of the assets they are attached to, they can be easily introduced into a blockchain ecosystem. This helps in facilitating a smooth and seamless transaction, with a faster processing and lower transaction fee, as it holds these same characteristics of Cryptocurrencies. They can be used in Centralized exchanges as well, and since Fiat Currencies take longer time and processing fee to transfer, the Stablecoins make it a convenient option to trade. Stablecoins can also be transferred without Banks acting as a middleman, as they are available on the internet and work on blockchain technology. They can also be used to buy and sell things on decentralized exchanges which do not accept Fiat currencies.

Can Stablecoin be the future of payment infrastructure?

There are several types of Stablecoins based on the kind of asset they are pegged with. The Fiat-Collateralized stablecoin is a kind of stablecoin which is attached to the Legal Tender of a Country, like Tether or TUSD (True USD). These are not issued by the central authority, but are tokenized versions of the actual currency created by the Company, after depositing the same value of Fiat in the reserves. Another type is a Commodity-backed stablecoin, which is pegged to Real Estates, Gold Silver etc. Crypto-backed stablecoins are another type of stablecoins, although because of the volatility of the prices of Cryptocurrencies, excessive collateralization is required in these coins, for example, If Stablecoins worth $1 million is attached to a Cryptocurrency like CIFD, the collateral of a higher value will be attached to Stablecoins. Non-backed stablecoins also exists, in which the prices, tokens and other variables are influenced through algorithms. Considering the different types of stablecoin, how integrated it is in today’s world, and the benefits of stablecoins, it would be a fair assumption to make that stablecoin could carve the way for future payment infrastructures.

Although slowly and gradually, Stablecoins are gaining traction and popularity, there are also factors which may be considered as roadblocks to becoming the future of payment infrastructure. One of the major arguments is that stablecoins are pegged to a reserve asset or liquidity, and although it guarantees safety from risks and volatility of the price, the Asset being attached to the digital coin means that that particular asset is out of the purview of usage for any other purpose. Another argument is that any Stablecoin not pegged to a reserve asset is still risky and can be volatile, even if the variables can be controlled through softwares and algorithms.

Stablecoins could facilitate several businesses, considering how expedient an option it is for accepting of payments and paying. It is faster, has lower transaction fee, is easily accessible, is low on risk and volatility as compared to cryptocurrencies, and can be used in Centralized as well as Decentralized exchanges. Stablecoins seem like a solution to inculcating the current payment structure into the digital era, while minimizing the existing lacunas and risks. Furthermore, considering that the market capitalization increased from $5.7 Billion in December, 2019 to $155.6 Billion in January 2022, it would not be a stretch to conclude that Stablecoins could be the future of payment. In the Crypto Industry, which has an expected evaluation of $10 Trillion in 2023, and some relatively reliable currencies like Bitcoin, Ethereum, CIFD, Litecoin, the Stablecoins bring in a sense of assurance.