Stablecoins are cryptocurrencies that are specially designed to maintain the given price stability, generally, with a peg to any underlying asset. Cryptocurrencies are basically volatile and have a weak unit of account value. Bitcoin is one of the best mediums of exchange and storing value. But it would not work as reporting currency for the financial statement or even for tax purposes as it is volatile merchants who are accepting crypto would have to worry about profit margin erosion if the value of the Bitcoin dropped considerably after receiving the payment from the client.
Volatility risk surely does not make sense in the ordinary course of selling goods or services, and this limitation has hindered cryptocurrency adoption. Stablecoins have indeed become the Holy Grail in crypto, creating the bridge between typical finance and the new world of the programmable world like blockchains.
Different factors that influenced the volatility of stablecoins
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Value proposition
A USD-stable coin can be held in a crypto wallet or any exchange besides other cryptocurrencies, dramatically enhancing liquidity while the holder needs to move from one position to even another. The friction of cashing out from crypto held in the wallet to USD in the bank account ends up bearing colossal time and cost, which can be easily eliminated by using stablecoins; stablecoins can effectively turn the Fiat currency into cryptocurrencies as stablecoins can be traded as any other crypto to crypto trade easily. You need to check USD Coin Price before deciding the value proposition.
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Centralization besides complexity
Chain collateral stable coins are completely centralized models, while algorithmic and off-chain collateral stable coins are very decentralized models that mainly focus on using blockchains and smart contracts. Centralized models are simple as compared to decentralized models, which require more stabilization mechanisms. The more complex the stabilization scheme would be, the more risk and likelihood of higher volatility in future blog data will describe the challenges of the algorithmic approach.
Stablecoins which rely on the combination of algorithms and smart contracts, need to maintain a price equilibrium also, fully it requires constant network growth and investment to provide perfect capital and support.
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Supply and demand
The Fiat peg would always be static at $1.00 if the stablecoin issuers were termed as the only gatekeepers for burning and creating stable points but every time clients buy tokens, they also get minted, and every time customers end up selling tokens, they also get burned. But assets always end up in the marketplace, and the stablecoins are also not untouched. For instance, you can buy or sell your tokens on an exchange at the market price instead of redeeming or purchasing them from any issuer.
The supply and demand strategies are the same for any cryptocurrency hence creating more prices or lesser prices than $1.00 at any time. In short, stabilization techniques are all based on the economic supply and demand model. The cost of any currency will be modeled at the level at which the supply and demand align with each other on the market for a change in the price because of the changes in the supply or demand to maintain stability.
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Asset correlations
The volatility of the markets for typical asset classes and the volatility of tangible assets like stable coins are almost similar, and there is no spillover effect in cryptocurrencies. Stablecoins are identical to all crypto coins. If there is a huge fluctuation in price for bitcoins and Ethereum, a specific stablecoin also undergoes a Black Swan event. Stablecoinn volatility also gets impacted overall. Stablecoins are impacted by cross-market volatility also from shocks originating in foreign exchange equity and physical gold markets. Shocks to Bitcoin and Ethereum indeed affect the error variance of the golden USD-backed stable coins to a great extent.
Stablecoins are very important as they add another complexity level and risk relative to any underlying assets. Underlying assets generally fluctuate in value, and cryptocurrency also fluctuates in value, so the blend of the two results in volatility to a great extent as compared to its parts. So you can say that stablecoins can be more susceptible to volatility when developers combine all the crypto features with price stability.
