The use cases and benefits of stablecoins in the crypto economy

When we talk about the StableCoins, some of the prominent ones which come to our mind are USDT, BUSD, and HBD. These are types of crypto itself but are mostly pegged to a currency (all the above three are pegged to the dollar). We all know that the crypto market fluctuates a lot, but these cryptos do not fluctuate much and they are designed in such a way that they maintain their stable value. For example, Hive went from $1.5 to $0.3, but the HBD is stable at $1, it marginally goes up and down but it is pegged to a dollar value.

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We can safely say that it is one of the stable cryptos out there in the market where its value is linked to the value of the asset it is pegged to. The stablecoins do not always mean that they will be pegged to a fiat currency itself, there are stablecoins which are pegged to a cryptocurrency too. Basically, stablecoins are of three types

1. Fiat-collateralized stablecoins
2. Crypto-collateralized stablecoins
3. Algorithmic Stablecoins

The Fiat collateralized stablecoins are the most prominent ones like USDT and BUSD which are pegged to US Dollars whereas the Crypto collateralized stablecoins are pegged to the value of a cryptocurrency. In the algorithmic type of stablecoins, there is an algorithm running behind which tries to keep the value from fluctuating much. Like in the case of HBD, there is a HBD-Stabilzer whose goal is to keep the price of the HBD pegged to US Dollar.

Use Cases of StableCoins

We have talked about stablecoins but what is the use case of stablecoins is the question. Since they are more stable than the other cryptos, they are actually more reliable alternatives to doing transactions efficiently. For example, if you are transacting in very volatile crypto, the value can increase or decrease in a fraction of a second after the transaction whereas when you do transactions with stablecoins they more or less keep the same value like pegged to 1 dollar (I am talking about Fiat collateralized stablecoins here).

You may ask, we can transact using the US Dollar instead. But think about the fees you will incur in converting your crypto (or your own currency) to US Dollars and then sending across borders and then converting it back to the receiver's own currency. If it is stablecoin like HBD then you can transact it freely between two accounts without any fees in between. Yes, there will be a fee for converting from your local currency to HBD and then from HBD to your local currency, but the amount will be quite less as compared to the traditional money transfer.

Benefits of using Stable Coins

As we have already talked about some of the benefits of using StableCoins, let me list some of them down out here.

1. Stablecoins provide price stability which will help the business to transact.
2. More people will be using it to transact because of its less volatile nature which means more adoption.
3. Fewer transaction fees as compared to country-specific currency. I can transfer HBD to any part of the world free of fee.

FAQs about StableCoins

What is the purpose of stablecoins?

The purpose of stablecoins is to provide the stability in the crypto world which otherwise is known as volatility. Since they are pegged to a fiat currency (mostly US Dollar), it is designed to maintain a stable value.

How are stablecoins different from other cryptocurrencies?

Stablecoins are different because their value does not fluctuate much and thus they always remain as close to the value of the asset they are pegged to.

Are there any risks associated with stablecoins?

Yes, that is true, there are risks in stablecoins too. The most prominent one is that if the issuer of that currency cannot maintain the value of the stablecoins then it will lose its value and will not be able to give that value to the consumer.

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