The Use Of Stablecoins In Business Transactions And Their Potential Benefits
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Published on: 25 January 2023
Last Updated on: 24 October 2024
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Stablecoins have emerged as a solid and robust investment option for individuals and businesses. They allow you to get into the world of cryptocurrency without having to know every detail of a project, its viability, and its potential growth.
They have the potential to revolutionize how money is handled and transferred and can quickly and easily replace traditional banking and transaction methods for businesses.
What Is A Stablecoin?
If you have used platforms like OANDA to buy and sell crypto, you have probably seen the term “stablecoin” before.[1] In simple terms, a stablecoin is a cryptocurrency whose value is tied to a fiat currency, such as the Dollar or Pound.
This means that stablecoins are a better alternative for everyday transactions than other cryptocurrencies. It also allows them to be used incredibly effectively in business and business-focused financial transactions.
Types Of Stablecoins
There are three kinds of stablecoins that you can find, namely, fiat-collateralized stablecoins, crypto-collateralized stablecoins, and algorithmic stablecoins.
Fiat-Collateralized
A fiat-collateralized stablecoin is reasonably self-explanatory. To offset volatility and ensure the value of the stablecoin remains balanced, some tokens hold a reserve of fiat currency/currencies to prop up and fix any significant dips in value.
Crypto-Collateralized
Crypto-collateralized stablecoins are similar to fiat-collateralized ones, except they are backed by other cryptocurrencies. The big difference is that these types of stablecoins often have far more crypto reserved compared to fiat stablecoins.
This is due to cryptos being inherently volatile. Therefore, to guarantee the value of the stablecoin, you need to have 50% or even 100% more crypto in reserve to offset the varying values.
Algorithmic
Algorithmic stablecoins are different from the other two types because they may or may not have anything in reserve. They rely on the algorithm to control the flow of the stablecoin and, therefore, can, theoretically, prevent any massive spikes or drops in value.
Stablecoin Benefits
In general, whether you are a business or an individual, there are three main benefits to using stablecoins as opposed to other cryptocurrencies.
Borderless
When you want to travel, it only takes a few clicks on an airline’s website to book a ticket to almost anywhere in the world. However, once you are there, how do you access the money in your home bank account and use it in your new destination?
Banks will often charge huge fees to transfer your money to a different country if they allow it at all. Stablecoins, like other cryptos, don’t have this problem. You can transfer them to wherever you are and have the money in hand in no time.
Cheap
Regarding fees, stablecoins are cheaper to transact with than fiat currency. Banks will charge a fee ranging from a few dollars to $20, $30, or even $40 to transfer a relatively small amount of money overseas.
Stablecoins don’t have these same types of fees attached to them. While you do have to pay a very minimal amount, it will almost always be possible to transfer stablecoins for much less than if you were transferring fiat currency.
Little To No Volatility
One aspect of crypto that investors often talk about is crypto’s volatility. It can be very unpredictable, and therefore you never know what the next day is going to bring and what your wallet will look like when you wake up in the morning.
Since stablecoins are pegged to fiat currencies, when you transfer money and add the small fee, that is the amount of money a recipient will receive. You also don’t have to worry about exchange rates while doing the transfer, as they have no impact on stablecoins.
How Stablecoins Can Benefit Businesses?
Now that the benefits of stablecoins for individuals have been discussed, how can they be used to improve financial transactions for businesses?
Security
While stablecoins are very closely related to fiat currency, as they are tied together, many think that they don’t take full advantage of the blockchain. However, since they are still cryptos, they have to be based on the blockchain to exist.
This means businesses that use stablecoins have the immense security that the blockchain offers. The blockchain can not be changed or, at present, can’t be hacked. Information is stored in such a way that as more data is added, it becomes even harder to hack the data that has been added before.
The blockchain is a very safe and secure way to send money around the world, no matter the size of the transaction.
Speed
Making large, corporate financial transactions can take much longer than many may think. There are a lot of hoops businesses need to jump through, as well as a lot of red tape that needs to be cleared before the money reaches its final destination.
Blockchain and crypto transactions as a whole are almost instant in their speed. There is no need to wait around for the transaction to be approved on your side and then wait for it to get to its destination; it happens in a few seconds, no matter how much money is being sent.
Cost
Transferring money through banks and financial institutions costs money, whether you are an individual sending money to family or a business conducting deals with overseas clients. These intermediary fees can sometimes get out of hand, depending on the amount you are sending and where you are sending it.
As mentioned, the fees attached to the stablecoins transactions are very minimal and affordable, whether you are a small business owner or run a corporation.
Availability
Banking hours, weekends, and holidays can become incredibly frustrating when you are trying to conduct business transactions. Even things like differing time zones or one country having a holiday on a workday for you can be annoying and slow processes down.
You won’t face these same problems when using stablecoins, as the crypto world doesn’t take any breaks. You can make transactions whenever you want; whether it is midnight or Christmas Day, the translation will still be done in a few seconds, no matter what.
Wrapping All Up:
Stablecoins are the type of cryptocurrency that limit the market values with external references. The stablecoins are a more valuable and more volatile type of cryptos that works as the mediums of the exchanges. Hope you are getting ideas about the functions of the stablecoins along with the advantages and disadvantages. You can share your opinion through the comment sections.
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