Stablecoin & its importance to the growth of an Ecosystem
Nowsaday, many decentralized financial products are promoting the use of Stablecoins by the entire ecosystem, thereby increasing the demand for native tokens, pulling the whole ecosystem up. At the moment, the stable coin UST of the Terra ecosystem is being discussed about a lot. So what is stable coin? Why does the introduction of a stable coin help the ecosystem to explode so much? Today let's learn about stable coin and its benefits in an ecosystem.
Definition
Not all cryptocurrencies fluctuate in price. In fact, one of them specifically designed to maintain a fixed price is stablecoins. In a crypto market where coins and tokens can fluctuate overnight, there is a huge demand for currencies that combine the benefits of blockchain while keeping prices stable. If you haven't started using stablecoins when trading or investing, you should learn more about them.
A stablecoin is a digital currency that is pegged to a “stable” reserve asset. They are designed to reduce volatility relative to unpegged cryptocurrencies like Bitcoin, Ethereum,...
Previously, crypto investors and traders had no way to lock in profits or avoid volatility without converting the cryptocurrency back into fiat. The creation of stablecoins provided a simple solution to these two problems. Nowadays, you can easily get in and out of crypto volatility using stablecoins.
Types of stablecoin
Fiat-backed stablecoins: A fiat-backed stablecoin will keep a fiat currency as reserve. Users can convert from fiat to stablecoin and vice versa at a fixed rate. If the price of the token deviates from the underlying fiat, arbitrageurs will quickly return the price to the fixed rate.
Crypto-backed stablecoins: Crypto-backed stablecoins use cryptocurrency as collateral. When the cryptocurrency market is volatile, crypto-backed stablecoins are often over-collateralized the reserves as a hedge against price volatility.
Algorithmic stablecoins: Algorithmic stablecoins manage the supply of the tokens issued through smart contracts. If the price falls below the fiat currency it tracks, an algorithmic stablecoin system will reduce the token supply & vice versa.
Why are stablecoins important to an ecosystem?
Stablecoins are not volatile by non-pegged cryptocurrencies, and they inherit some of most powerful strength. They separate the "high risk-high return" characteristic of cryptos from the frequent volatility of crypto assets. Stable characteristic makes Stablecoins a more suitable cryptocurrency for storing and as a medium of exchange of value.
You can send a stablecoin to anyone globally who has a compatible crypto wallet. Fast processing and low transaction fees make stablecoins a good choice for sending money anywhere in the world. People may send as much as a million dollars worth of stablecoins with transfer fees of less than one dollar.
There are easy ways to earn interest on a stablecoin investment. When the market becomes gloomy, it is necessary to accumulate safe assets. At that time, investors will gradually move their investment portfolio to stable coins. An ecosystem that already has its own stable coin will create more favorable conditions for investors. Because they do not need to transfer assets to other ecosystems or to a centralized exchange to convert to stable coins. This will not only help the money flow to stay in the ecosystem, but also attract money flow from other ecosystems. Currently, there are many different types of financial products such as farming, mortgage, stake, lockdrop... with extremely high APR.
Basically, decentralized financial products will promote the use of Stablecoins by the entire ecosystem, thereby increasing the demand for native tokens, pulling the whole ecosystem up. Moreover, when money flows into the ecosystem, the ecosystem will get more attention, more capital will be provided, and more investors want to participate in the ecosystem. These are absolutely positive moves for the long-term development of an ecosystem.
References
https://coin98.net/posts/search/near
https://academy.binance.com/vi/articles/what-are-stablecoins