Several countries in Latin America are following the trend of virtual currencies. El Salvador adopted them as legal tender and in Panama recently, a draft law called “Crypto” was presented that seeks to make the country compatible with the blockchain, crypto assets and the internet.
Currently one of the biggest obstacles to cryptocurrencies is their volatility. According to data from Investopedia, cryptocurrencies such as Bitcoin (BTC) have had a price volatility of 8% in a period of three months. However, Blockchain technology has found a solution to this great obstacle.
This unstable volatility, which causes its price to increase and decrease every day, makes the investment a high risk due to the lack of guarantees. However, in order to find a more attractive alternative for investors, Blockchain technology created a new type of cryptocurrency called Stablecoins or Stable Coin, which offers price stability by supporting one or more assets.
Otto Mora, Senior Blockchain Manager at EY Firm explains that “Stablecoins definitely have great potential, and they are necessary to support a highly volatile market. Every day more virtual money is positioning itself in Latin America, therefore having mechanisms that demonstrate that cryptocurrencies are safe and have great advantages will help a rapid adoption in financial markets.”
According to BBVA, Stablecoins are a type of digital token or cryptocurrency that tries to imitate or link its market value to another asset or external reference. The purpose of this digital token is to maintain a stable price and thus reduce volatility. For this, its price can be linked to the price of basic products such as gold, oil, or the value of money such as the dollar, and the euro, among others.
The first Stablecoin appeared on the market in 2014 known as Tether, this model (Fiat Currency) has been the basis for various types of stablecoins and consists in that users can deposit US dollars on the platform and receive tokens called USDT in exchange; which can be used to exchange goods or to invest. Subsequently, other Stablecoins have emerged that are setting the tone for those who want to use a global currency.
It should be noted that most of the Stablecoins that currently exist use the dollar as collateral, however, they are also linked to currencies such as the euro and the yen. As a result, the price of this type of Stablecoins (Fiat) fluctuates very little, unlike the better known cryptocurrencies such as Bitcoin and Ethereum, which are inclined to have high volatility.
These crypto assets to maintain a fixed value do so by the following mechanisms:
· Fiat currency: Linked to certain fiat currencies such as the dollar or euro in a 1: 1 ratio
· Backing for goods: they can be linked to goods such as gold since when “anchoring” the price of this they maintain a stable value
· Backed with other types of cryptocurrencies to maintain their stable value such as DAI or Ethereum
· Not associated with any external security: Controlled by algorithms to avoid price fluctuation through algorithms and “Smart Contracts”
Without a doubt, Stablecoins are crucial to the future of the crypto ecosystem, and can help solve the great hurdle of volatility that puts those who want to invest or adopt digital currencies in doubt.