Arbitrum Layer 2 for Scalability & Efficiency
Learn why Arbitrum is a powerful layer 2 blockchain solution for scalability and efficiency.
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Majority of cryptocurrencies are super volatile assets. Many times cryptocurrencies have…
Majority of cryptocurrencies are super volatile assets.
Many times cryptocurrencies have proven they can be more volatile than securities and other popular investment assets. Some have even gone up ten times in value in a matter of days.
This makes them an interesting investment for many high-risk retail and institutional investors. Its unique design makes it easy to access huge potentials to earn high rewards in such a short amount of time.
However, a great number of people enter the crypto market also to gain access to decentralised financial services, better known as DeFi.
Using DeFi to exchange goods and services will require a non-volatile digital asset for it to be practical. And since most cryptocurrencies fluctuate unpredictably, comes an immediate need for a tradable and stable digital currency:
A stablecoin is a specialised digital reserve asset whose value remains virtually unchanged. They resist most frequent low-to-high volume changes in the market, unlike their other more volatile cryptocurrency counterparts.
There are four primary types of stablecoins. Three of these types run on collateral-based systems that use fiat currencies, cryptocurrencies, and/or commodities to peg their stable values on. The fourth type of stablecoin uses a non-collateralized system that maintains price stability through the use of algorithms and smart contracts.
Stablecoins are usually used to trade other cryptocurrencies and use decentralised financial services. Unlike centralised bank-issued fiat currencies, you can use stablecoins at any time on any given day wherever you are in the world without having to ask permission from a centralised body like banks or brokers to make a trade. In short, faster, unlimited, and easier access to financial services.
Built on blockchain technology, stablecoins also function together with smart contracts. They require no intermediaries to execute the smart contract. Instead, these contracts adhere to code written and agreed upon by both parties, creating transactions that traditional finance wouldn’t normally have possible.
From trading and transactions to lending and borrowing, stablecoins give investors, creators, and traders a unique and practical digital asset to do a new way of finance. One that is decentralised — DeFi.
So, how do stablecoins come into existence? How are they made into the blockchain?
Stablecoin providers start with identifying what type of stablecoin they’ll be developing.
Choosing from the aforementioned four types of stablecoins, stablecoin developers build stablecoins on either the use of collateral assets or programmed smart contracts.
If they use collateralised stablecoins, these stablecoin providers will have to maintain reserves of these collateral assets to back their value and supply. Yet, the uncertain risk of whether or not these providers have these collateral assets — remains.
After providers choose what type of stablecoin they’re going to develop, they then identify where and how they’re going to develop their stablecoin. Including how they’re going to maintain its liquidity and stability.
After technical and branding completion, stablecoin providers then integrate their stablecoins on the blockchain and launch them on their preferred exchanges.
In fact, anyone, even you, can create stablecoins.
But are stablecoins truly decentralised?
Yes and somewhat no. Stablecoins are built on the decentralised technology of the blockchain. This means no regulatory or central entity controls it including all stablecoin providers. However, some stablecoins peg their values on centralised assets like fiat currencies and commodities. They may be decentralised on the blockchain but the assets that they’re pegged onto are centralised.
Although there are a few stablecoins that are fully decentralised such as algorithmic stablecoins, most stablecoins used today are only somewhat decentralised. But again, unlike centralised assets, investors and owners get full ownership of their stablecoins.
Stablecoins are decentralised and function just as much as other decentralised financial assets.
Use cases for stablecoins multiply together with the growth of the DeFi space.
As the crypto market continues to be in need of a stable and practical digital asset to trade with, stablecoins will continue to be in use and in development for the near future.
Possibly, it’ll make its mark as a standard asset in decentralised finance.
Dive deeper into stablecoins in our more detailed blog on the current use and potential growth of stablecoins in digital finance.