In recent years, cryptocurrencies have gained prominence in the financial landscape, offering new ways to conduct transactions and investments while bringing various advantages. However, one of the main concerns surrounding these digital currencies is the high volatility of their prices, which can fluctuate drastically in short periods of time. It was in this context that stablecoins emerged, becoming an essential component of this new digital financial system.
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The term can be translated as “stable currencies” and refers to a type of cryptocurrency designed to maintain a stable value over time, making it easier to use for transactions. While some people use cryptocurrencies as an investment, trying to exploit price variations on exchanges for gains, others prefer to use the technology of digital currencies for their speed, convenience, and security without having to worry about high volatility.
How do stablecoins work?
To achieve price stability, stablecoins are pegged to a stable asset, which can be commodities like gold or fiat currencies such as the dollar or euro, for example. The main example is Tether, known in the cryptocurrency world by the symbol USDT. Currently, it is the third-largest cryptocurrency by market value, with around $120 billion, trailing only Bitcoin and Ethereum (ETH).
In the case of USDT, the digital currency 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 $1, offering several advantages for those who want to use cryptocurrencies in digital transactions. Another similar stablecoin is USD Coin, symbol USDC, which also uses the US dollar as backing and has the sixth-largest market value, with $34.8 billion.
What are stablecoins used for?
Imagine a merchant who wants to buy and sell using cryptocurrencies but only deals with Bitcoin. From one day to the next, they could experience significant price changes in their products and contracts with suppliers. A product sold today but delivered in three days could have a completely different final value. Besides managing their business, this merchant would need to constantly monitor Bitcoin prices to find the best moment for transfers.
It’s easy to see why this situation would be a nightmare in terms of organization, planning, and cash flow. However, many people want to enjoy the inherent advantages of digital currencies without performing all this “juggling.” In this case, stablecoins serve as a valid alternative. Since they maintain a nearly stable value relative to a known asset, they allow transactions to be made with stability. With stablecoins, cross-border transfers, can be made without using traditional banking systems.
In addition to being a faster method, they avoid losses from constantly paying exchange rate fees and can later be converted into fiat currencies or other cryptocurrencies. Another important function is in unstable economies, where inflation may erode citizens’ purchasing power. Using USDT or USDC, users can keep their savings pegged to the value of the dollar and protect themselves from this variation. Moreover, stablecoins play a crucial role in the decentralized finance (DeFi) ecosystem, where they are used in platforms for loans, liquidity, and other innovative financial services.
Conclusion
The technology behind cryptocurrencies is here to stay, and its adoption has surged worldwide over the past 15 years. At the same time, not everyone is willing to deal with the high volatility present in major digital currencies. In this context, stablecoins represent something many people seek when it comes to their finances: stability. They bring new opportunities and facilitate transactions, especially international ones, becoming part of the future of the crypto market. It is worth noting that, although blockchain technology is secure, it is also up to users to take the necessary precautions against online fraud.
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