In recent years, cryptos have gained prominence in the financial landscape, providing new ways to conduct transactions and investments while offering various advantages. However, one of the main concerns surrounding these digital assets is the high volatility of their prices, which can fluctuate drastically within short periods. It was in this context that stablecoins emerged, becoming an essential component of this new digital financial system.
The term refers to a type of cryptos designed to maintain a stable value over time, making it easier to use for transactions. While some people use cryptos as an investment, attempting to profit from price fluctuations on exchanges, others prefer to use digital assets for their speed, convenience, and security—without worrying about extreme volatility.
How Do Stablecoins Work?
To achieve price stability, stablecoins are pegged to a stable asset, such as commodities like gold or fiat currencies like the US dollar and the euro. The primary example is Tether, commonly known by its ticker symbol USDT. Currently, this is the third-largest crypto by market capitalization, valued at approximately US$ 143 billion, behind only Bitcoin and Ethereum (ETH).
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In the case of USDT, the digital asset is pegged to the US dollar. This means that for every stablecoin in circulation, there is a corresponding reserve in fiat currency. As a result, the value of 1 Tether remains close to US$ 1, offering various advantages for those who want to use crypto for digital transactions. Another similar stablecoin is USD Coin (USDC), which is also backed by the US dollar and ranks as the sixth-largest crypto, with a market capitalization of US$ 60 billion.
What Are Stablecoins Used For?
Imagine a merchant who wants to conduct business in cryptos but only deals in Bitcoin. From one day to the next, they could experience significant fluctuations in product prices and supplier contracts. A product sold today but delivered three days later could have a completely different final value. In addition to managing their business, this entrepreneur would constantly need to monitor Bitcoin’s price to determine the best time to complete transactions.
It’s easy to see why this situation would be a logistical nightmare in terms of organization, planning, and cash flow management. However, many people want to enjoy the advantages of digital assets without having to navigate these challenges. In this case, stablecoins provide a valid alternative. By maintaining a relatively stable value tied to a known asset, they allow for more predictable transactions.
Stablecoins also enable cross-border transfers without relying on traditional banking systems. In addition to being a faster method, they help users avoid losses due to frequent exchange rate fees, and they can later be converted into fiat currencies or other cryptos. Another key use is in economies with high inflation, where purchasing power can be eroded over time. By using USDT or USDC, individuals can preserve their savings in a crypto pegged to the dollar and shield themselves from inflationary fluctuations.
Additionally, stablecoins play a crucial role in the decentralized finance (DeFi) ecosystem, where they are used for lending, liquidity provision, and other innovative financial services.
Conclusion
Crypto technology is here to stay, and its adoption has surged globally over the past 15 years. At the same time, not everyone is willing to deal with the high volatility of major digital assets. In this context, stablecoins provide what many people seek when managing their finances: stability. They create new opportunities and simplify transactions, particularly international ones, making them an integral part of the future of the crypto market.
While blockchain technology is inherently secure, users must also take necessary precautions to protect themselves from online fraud.
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