It is technically impossible to use blockchain for transactions with traditional real assets. In the digital world, there is no place for real values; for the blockchain, alphanumeric codes, hashrate, and the number of transactions matter.
At the same time, cryptocurrencies have not become a self-sufficient phenomenon, at least not yet. Their practical application as an alternative means of payment is extremely difficult, in particular, due to the uncertainty of the legal status and extreme volatility. The idea of some kind of bridge between digital and real assets was just in the air.
In 2015, the first stablecoin appeared on the cryptocurrency market, which gave rise to stablecoins – a new type of digital asset. It was USDT (Tether), a USD-pegged coin. Since that time, several dozen stablecoins have been put into circulation.
A common feature of such coins is the proportional binding of value to other assets. The collateral asset can be fiat currency, securities, oil, precious metals, real estate, or other cryptocurrencies.
What are stablecoins
There is no single, well-established classification of stable digital assets yet. For the convenience of comparing assets, experts group assets according to the criteria that best fit the research topic. Most often, coins are grouped by collateral asset class, issuer centralization, and reserve requirements.
According to the centralization of the issuer, stablecoins are divided into three types:
- Centralized. In fact, this is not a cryptocurrency, but digitized fiat currencies. The issuing companies claim that each token is backed by real-life assets that are stored in special company accounts. By the principle of operation, centralized stablecoins resemble the already familiar electronic payment systems like Payeer, but are based on the blockchain.
- Decentralized or algorithmic. Such coins appeared in 2013. They are backed by underlying blockchain tokens and stabilizing smart contracts. They function like real cryptocurrencies and are not centrally controlled.
- Banking. It is assumed that the functioning of such stablecoins will be provided by central banks.
Centralized stablecoins are the most popular. At least because they are well understood by users and well-pegged to the dollar. These features of the coins contributed to their active integration into the real economy.
Algorithmic stablecoins are used in DeFi and are unlikely to go beyond them quickly. Considerable damage to the reputation of algorithmic stablecoins was caused by the collapse of Terra, which occurred in the spring of 2022.
Bank stablecoins are a real exotic. They still exist in the Bahamas and Venezuela, but the prospects for their widespread introduction still look very doubtful.
How stablecoins are used
Popular stablecoins pegged to the dollar are represented on almost all cryptocurrency exchanges. These are perhaps the most highly liquid coins that have become a universal solution for storing and transferring capital among traders and investors. Converting USDT to SOL or any other coin is done quickly and without additional operations.
Another role of stable digital coins is buffers. A low volatility coin is vital when entering a high capital market. First, it is converted into low-volatility digital money, and then trading begins. The low volatility of stablecoins makes it possible to take profits and protect capital during periods of particularly high market volatility. Agree, it is quite reasonable to convert QKS to BUSD for a while if the market turns against you and wait out this period.
Perhaps in the relatively near future, stable digital coins will find wider use in countries with unstable economies to protect against inflation.
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Ways to earn money
Even stablecoins are not immune from sudden bouts of volatility, but this is still an extremely rare occurrence. Therefore, speculative strategies are hardly worth considering seriously. More promising ways are staking, farming, and providing liquidity using stablecoins.
