Should you really treat stablecoin as mainstream cryptocurrency?

The growing demand for cryptocurrencies and the growing use cases seen by investors has forced many of us to invest in digital assets. The huge returns seen by currencies like bitcoin and other cryptocurrencies in recent years have fueled demand, making the market more volatile. In such a market, how does one minimize risk and maximize returns? That’s when stablecoins come into the picture.

Stablecoins, simply put, are cryptocurrencies with very low volatility and price stability, as they are backed by cash and cash assets, keeping their prices predictable with minimal risk. Since the possibility of cryptocurrency becoming insignificant from a million dollars is a possibility in a very short period of time, stablecoins are used to cover bridges between fiat and crypto for payments, lending, trading and alternative banking transactions.

However, currencies such as bitcoin and ethereum are highly volatile as they rise and fall in irregular patterns. This is something that stablecoins eliminate. But given its nature of being backed by fiat, it raises the question of whether a stablecoin is really a cryptocurrency or a digitized version of fiat currency. Your guess here is probably the same as ours. Stablecoins fall into the gray area, drawing parallels from both worlds.

Fiat-backed stablecoins are constrained by all the regulations that come with fiat currency, compromising the efficiency of the conversion process and the potential efficacy of digital assets. For example, Facebook’s Libra currency promised a stablecoin backed by a basket of global fiat currencies, thus broadening the coin’s appeal and utility. However, it received such regulatory backlash that the project’s management had to abandon it. To date, the network is still struggling to get regulators to approve its stablecoin. Not only that, but all stablecoins require third-party regulations, which makes it very difficult for them to join the real decentralization movement.

Stablecoins are helpful because they make it easier for users to transact in cryptocurrencies. They provide a link between volatile cryptocurrencies and real-world assets such as fiat currency. By trading stablecoins instead of US dollars, you can keep all your transactions within crypto exchanges, while avoiding the fees charged by many exchanges and maintaining the anonymity of transactions. Stablecoins are used as a bridge between cryptos that are run on different networks, without requiring the user to fall back to fiat currency for conversion.

While stablecoins are great intermediaries for the decentralization movement, this may not be enough for them to be accepted into the mainstream cryptocurrency family as their value is derived from fiat currency, commodities, other crypto currencies and/or algorithms. What started out as a means to reduce the volatility of crypto has become a recourse for decentralization. Missing out on the aspect of complete freedom, the point of being a cryptocurrency is lost when it is backed by fiat currency.

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