In recent years, stablecoins have become immensely popular with huge growth in their market capitalization observed Bahaa Abdul Hussein. There is a great demand for stablecoins and the rise of decentralized stablecoins is due to different reasons like cryptocurrencies gaining popularity and the requirement of stable assets. Following DeFi protocols, users can use stablecoins as a base currency to carry out decentralized activities like trading, lending, and borrowing.
Decentralized Stablecoins – An Introduction
Stablecoins are digital currencies that are much safer and not volatile like Bitcoin, Ethereum, and other cryptocurrencies. The characteristics of a stablecoin are similar to other cryptocurrencies and a blockchain issues them. The main difference is that only if an issuer gets a stablecoin-represented asset, the minting of the stablecoin is possible. This is popularly known as 1:1 backing. Decentralized stablecoins have their value pinned to an external real-world asset which in turn helps to curb volatility. They are noncustodial and not controlled by any centralized party. The supply of the coin is controlled by an algorithm and smart contracts.
Risks or Challenges with Stablecoins
Decentralized stablecoins are unfortunately not without their unique set of risks. The noteworthy ones are:
- Because of being in the experimental phase, a lot of decentralized stablecoins are not fully decentralized
- The value of a stablecoin will fall if an external asset’s value trips
- Some stablecoins let traders earn interest
- There is always a possibility of a stablecoin facing a price meltdown
- Many decentralized stablecoins are unlikely to survive long-term and have high liquidity as not been adopted widely.
Opportunities or Advantages of Decentralized Stablecoins
Decentralized stablecoins have brought enhanced security and transparency. Instead of an issuing company, algorithms maintain the stability of stablecoin values and control their circulating supply. As there are no middlemen, traders are more inclined towards stablecoins. The uses or opportunities of using decentralized stablecoins are similar to regular ones. The major benefits of decentralized stablecoins now are:
- More transparent
- Enhanced security
- Solves the legal challenges linked with the issuance of stablecoins
- The disadvantages do not outnumber the risks
- Less possibility of a loss as they are more efficient than centralized stablecoins
Conclusion
In the DeFi industry, decentralized stablecoin comes with its own challenges and opportunities. The main obstacles are keeping the price stable and adhering to regulatory requirements. On the other hand, decentralized stablecoins are more innovative and offer more stability and accessibility. It will be interesting to see how the financial ecosystem alters by using decentralized stablecoin in the future.
The blog has been authored by Bahaa Abdul Hussein and has been published by the editorial board of Fintek Diary. For more information, please reach out to www.fintekdiary.com
