Table of Content
Stablecoins are digital currencies that preserve a firm value by being tied to a reserve of assets like commodities and traditional fiat currencies.
A stablecoin is a type of cryptocurrency that is designed to maintain a value linked to a specific asset, such as the US dollar. It is designed to maintain a relatively stable value, unlike Bitcoin or Ethereum, whose value changes significantly.
In simple terms, stablecoins are a digital version of traditional money. If you hold a stablecoin worth $1, you can use it to send or receive money digitally without the large price fluctuations.
Different Use Cases of Stablecoins
Stablecoins act as a bridge between traditional currencies and the crypto world. Instead of converting their crypto into fiat every time, investors can move their funds into stablecoins and keep them within the crypto ecosystem, making it easier to trade and manage their funds.
Stablecoins are widely used for cross-border payments, on-chain savings, institutional settlement, DeFi collateral, and everyday payments.
Cross-Border Payments and Remittances
Using stablecoins, you can send or receive payments across the world within minutes and at lower fees. Cross-border payments are expensive because each intermediary adds fees for each payment. Stablecoins avoid such problems because they are built on blockchain networks, they can reduce or bypass the need for intermediary banks.
Treasury and Deposits
This use case is beneficial for businesses; they can hold stablecoins as their working capital and can potentially generate revenue through reserve yields and other issuer-related activities. They can also make international payments to make their trade reach globally. If there is an individual who lives in a country experiencing high inflation and doesn't have access to US dollars can use a stablecoin as a store of value.
Tokenization
Stablecoins provide settlement for tokenized assets, which opens a way for new possibilities of market functions such as equity, fundraising, and debt financing. Stablecoins can support global market systems, such as tokenized deposits, tokenized mutual funds, and other future on-chain securities. Stablecoins are the cash that can be used to buy or sell these assets on-chain.
DeFi Liquidity & Trading
Stablecoins let users trade, lend, and borrow without worrying about the high volatility associated with assets like Bitcoin or Ethereum. They serve as a foundation for cash and liquidity in DeFi, supporting activities such as lending, borrowing, and yield strategies like liquidity provision.
Types of Stablecoins and How They Work
Stablecoins are designed to be pegged to a specific asset or to the US dollar. They are particularly designed to maintain a stable value. They do not use the same methods to achieve this stability. Different mechanisms determine how they maintain their peg.
There are four primary types of stablecoins such as fiat-collateralized, commodity-backed, crypto-collateralized, and algorithmic.
Fiat-Collateralized
Fiat-backed stablecoins hold reserve currencies like the U.S. dollar to secure their value. Independent custodians keep these reserves, and it regularly audited.
Fiat-backed stablecoins are supported by traditional assets, such as US dollars or short-term government securities. Stablecoin issuers earn money through reserves, which support tokens in circulation.
For example, imagine if an issuer has $100 million worth of USD-pegged stablecoins in circulation, it needs to maintain approximately $100 million worth of eligible reserves to support those tokens in circulation.
The redemption and reserve process also keeps the stablecoins maintained at the $1 target. For example, if the stablecoins fall to $0.98, traders can purchase them at a lower price and redeem them with the issuer for approximately $1 each, which creates an opportunity for profit and may increase demand for the tokens.
Crypto-collateralized
Stablecoins are backed by other types of crypto assets rather than traditional assets such as US dollars or government securities. The blockchain networks store the collateral, which includes assets such as ETH, WBTC, etc.
Because cryptocurrencies can experience significant price fluctuations, stablecoins often use more collateral than the value of stablecoins issued. This extra collateral provides a safety cushion if the value of the underlying crypto asset falls.
If a user deposits $100 worth of ETH into a smart contract. Then, they receive only $50 worth of stablecoins. This is due to price fluctuations, because if the value of ETH falls, the extra $50 of collateral helps protect the system.
According to the platform’s rules and fees, the user can retrieve their collateral by repaying the stablecoins.
Algorithmic / Hybrid
This method does not depend on either fiat or crypto collateral but instead relies on algorithms to control the supply. Algorithms use predefined rules and automated mechanisms to keep their price close to the target.
For example, if the stablecoin price goes above its target, they increase the supply by adding extra tokens, and if the price falls below the target, they reduce the supply by burning tokens or providing incentives that encourage users to remove tokens from circulation.
The main idea is to use automated incentives rather than relying on traditional reserves.
Why do Businesses Launch Stablecoins?
Have you ever wondered why businesses have started focusing on stablecoins? Because it has become a practical way for businesses to use blockchain technology without being exposed to extreme price swings.
Stablecoins settle transactions rapidly on blockchain networks, which gives businesses access to funds quickly to pay suppliers and reinvest without delays.
- Unlike traditional payment methods, stablecoins can enable direct transactions with less paperwork. All stablecoins provide instant, direct transactions worldwide, and generally require only an internet connection. This enables businesses to conduct transactions more quickly and stand out among competitors.
- Companies prioritize stablecoins because they work like digital cash that can move across borders 24/7. They can also make faster payments using stablecoins. This will help to avoid the delays often associated with traditional banking.
- USDT and USDC are popular stablecoins that allow businesses to store and transfer funds across borders quickly and conveniently.
- Bitcoin and Ethereum are the traditional cryptocurrencies that experience significant price fluctuations. Stablecoins avoid those fluctuations because they are designed to maintain a more stable value. This stability is the core reason for businesses to focus on launching stablecoins.
- Paying global vendors becomes a task as it requires multiple banks and exchanging currencies, which makes the whole process slow. But with stablecoins like USDT and USDC, the payments can be done in a single currency in near real time.
How Fourchain Can Help You in Creating a Stablecoin For Your Own Use Case?
Demand for stablecoins is growing among businesses. The right way to build stablecoins is to understand their intended use cases. Build your stablecoin with Fourchain’s blockchain expertise.
Fourchain helps you develop stablecoins with use cases tailored to your business requirements, such as payments, cross-border transfers, trading, and digital transactions, with a focus on security and scalability.
Build your stablecoin with us today!
