The governments are worried over the popularity of stablecoins across the whole world. There are many reasons for that and the biggest one is they are transparent, blockchain-based and DeFi.
Some of the articles are mentioned below that show how alarmed the governments all over the world are becoming seeing the utility and popularity of stablecoins which puts forward the concept of “Free Banking.”
- Japan puts new restrictions on stablecoins
- Stablecoins: these cryptocurrencies threaten the financial system
- U.S. Senate Banking Committee to Convene on Stablecoins
- The explosion in stablecoins revives a debate around “free banking”
What are stablecoins are they any different from other crypto coins? However, stablecoins are also the same cryptocurrencies that are pegged to a single supposedly stable asset or a basket of stable assets. These stable assets can be other cryptocurrencies, local Fiat currencies or other commodities such as gold.
For example, USDC is pegged to the US Dollar which means it aims to keep the price stable at $1 USD. USDC is an Ethereum based stablecoin launched in 2018 by a consortium called center and founded by Circle and CoinBase.
To get a USDC token you send a USD to the token issuer’s bank account. The issuer then uses an ERC20 Smart Contract to create an equivalent amount of USDC which is then sent back to you.
These substituted US dollars are held in reserve. This guarantees that every USDC token is backed by US dollars.
So far so simple, but what’s the point? Essentially what USDC is doing is tokenizing US dollars and putting them on the blockchain. This makes them easier to transfer so they can be moved anywhere in the world almost instantly.
This is not like the current dollar which moves relatively slowly. The traders and the investors use USDC for many reasons, one of the primary reasons is to hedge against volatility during market dips. Also when selling crypto while keeping their funds on the platform ready for their next play. They don’t have to pay fees for fiat on and off ramps.
The Generations of Stablecoins
First Gen Stablecoins
The first generation of stable coins in the context of (Fiat-backed tokens) are the ones that exist today such as USDS, PAX, USDC and USDT. These Generation 1 stablecoins employ the fundamental aspects of stablecoin technology; a stable price and the use of blockchain technology. The most popular and proven genuine stablecoin maintains a fixed price by using a Fiat reserve to exchange their stablecoins to their fiat currency of choice, usually the US dollar.
Second Generation Stablecoins
The second generation of stablecoins is likely to develop in the next few years having the Gen 1 fundamentals of stablecoins but with further advantages. These Gen 2 stablecoins will have features built-in such as privacy, rewards, interests, credit and so on. They will fully make use of the fact that stablecoins are a programmable currency and so they can be added with utilities relevant to their various use-cases such as payment, remittance and stores of value.
Third Generation Stablecoins
The third generation of stablecoins will become a staple of the payment economy. The 3rd Gen. stablecoins will be basket tokens combining Gen 1,Gen 2 and even other Gen 3 stablecoins to combine the utilities of the individual tokens.
Are Stablecoins Beneficial?
Stablecoins are very stable in price that’s what the name comes from as compared to other cryptocurrencies which are volatile. So there are many benefits of stablecoins some of which are mentioned below:
Transparency – The Stablecoin transactions are absolutely transparent to the core since the smart contracts are involved and the system is fully automated.
Fastest Transactions – Stablecoins are quickly convertible as compared to Fiat currencies which are slower than snails.
Lowest Fees – The transactions for stablecoins are charged with lesser fees as compared to fiat currencies since the transactions take place through a DeFi system which is set to charge low.
Programmability – The stablecoins are programmable and digital assets which Fiat currencies are not.
No Boundaries – There are no boundaries for Stablecoins. They are absolutely borderless in the true sense of the word.
Seeing the utility, transparency and tons of other uses it appears Stablecoins are an open challenge to the whole centralized finance system and their grip is tightening on it with every passing second.