The role of stablecoins in decentralized finance
Stablecoins are a type of cryptocurrency that are either pegged on a stable asset, such as the US dollar — a government-issued fiat currency or an algorithm which preserves its peg to a stable number. It is a US$130 billion market that encourages public adoption due to its stable value. Examples of stablecoins are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI).
Here are various roles stablecoins play in the growth of DeFi:
It provides a stable currency
Stablecoins are widely used because of their stable price, which is necessary to avoid the extreme price movements in the crypto space. For instance, USDT is pegged to the US dollar and this coin’s value is stable at roughly US$1. People are more inclined to spend it than save it.
It can be used in lending and staking
As a form of passive income, these coins can be lent or staked. The lender can earn interest payments proportional to the amount lent. Some platforms also provide newly-launched coins as rewards for staking on top of the interest gained. It is generally advised to lend or stake your idle assets when dealing with stablecoins.
It is useful for value preservation for traders
Cryptocurrencies are known to be highly volatile, which means intraday pricing can be wild. Most traders store stablecoins in their crypto wallets to make it easier to buy or trade with other coins when the time is right. Stablecoins act as a medium of exchange and can be stored for longer periods without having to worry that its price will change excessively.
It encourages public adoption
Public reaction was a double-edged sword when altcoins started sprouting like mushrooms with the boom of Bitcoin. Some found themselves millionaires overnight, while others saw fear in investing because of the high possibility of losses. Stablecoins encourages public adoption, even by conservative investors, because of the form value they provide. It can be used in remittances, payments, or other forms of asset transfers.
It provides convenience during economic upheavals
COVID-19 crippled even the strongest economies. Cross-border payments and remittances saw a dip with people spending less, unsure when the pandemic will end. The world saw the need for a means to send and receive money for a wider audience with lower fees. Digital assets through stablecoins can achieve these gaps with digital and direct or peer-to-peer transfers.
In conclusion: The stable nature of stablecoins is key in decentralized finance to allow for the exchange of assets through smart contracts at a lower cost. Volatility is an unwanted risk, which stablecoins can offset when dealing with cryptocurrencies. It encourages faster mass adoption with more people gaining trust in doing transactions.
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