Why stablecoins are underrated

14 November 2023

Stablecoins are often considered the less ‘glamorous’ member of the crypto family but they have been steadily gaining attention and popularity in the world of digital finance. In a realm dominated by the volatility of Bitcoin and other crypto, they have emerged as a reliable and stable counterpart. But make no mistake, they are not ‘just’ the boring cousins of crypto. They offer a unique set of benefits and use cases that set them apart; and they’re increasingly being recognised for their value and versatility.

What are stablecoins?

Stablecoins represent a category of cryptocurrencies backed by reserve assets, such as fiat currency or precious metals. They have gained popularity for their ability to combine the rapid transaction processing, security and efficient features of crypto with the reliability of the underlying asset – in NZDD’s case the New Zealand Dollar. Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, which often experience extreme price fluctuations, stablecoins have been engineered to minimise volatility and provide a more predictable store of value.

What they have in common with other crypto tokens

Like other cryptocurrencies, stablecoins leverage blockchain technology, offering transparency and security. Their public ledger ensures that every transaction can be tracked and verified, drastically reducing the risk of fraud and manipulation. 

In the same way as other crypto, stablecoins also address the issue of financial inclusion. In many parts of the world, widespread access to traditional banking services is limited, and individuals lack access to stable currencies or effective payment methods. Stablecoins provide an opportunity for those without access to conventional banking to participate in the global digital economy – all they require is an internet connection and a wallet.

What makes them different (and underrated)

A ‘safe haven’ in the crypto storm 

One of the distinguishing characteristics of stablecoins is their ability to maintain their stable value. This is their ‘superpower’ and for users who are wary of the wild price swings common in the crypto market, stablecoins offer a safe haven.

While Bitcoin and other digital assets can skyrocket or plummet in value over a short period (within hours or overnight), stablecoins like NZDD are specifically designed to minimise this price volatility because they represent the underlying value of the assets backing them i.e. NZDD is backed 1:1 by NZD held in the bank.

This stability is particularly attractive for risk-averse investors, businesses, and individuals who need a reliable medium of exchange or a store of value without worrying about their holdings losing significant value overnight.

Hedging against market volatility

Stablecoins also offer a tool for hedging against the volatility of other crypto. Traders often use them as a way to temporarily exit volatile positions, effectively ‘parking’ their assets in a stable currency until they decide to re-enter the market when it’s less risky to do so. This strategy can protect them from significant losses during extreme price fluctuations while still maintaining exposure in the crypto space.

Distinctive use cases for stablecoins

Stablecoins are more than just a ‘safe bet’; they represent a significant step forward in the financial industry, offering an exciting alternative to traditional fiat currencies and providing a bridge between the traditional and digital financial worlds. 

De-risking fast and efficient cross-border transactions

One of the standout features of stablecoins is their efficiency for cross-border transactions. Traditional international money transfers can be expensive and time-consuming, involving multiple intermediaries and currency conversion fees. Stablecoins provide a swift and cost-effective alternative, enabling instant cross-border transfers at minimum cost. This makes them an excellent choice for individuals or businesses engaged in global commerce – there is no need to rely on the traditional banking system; and minimal expose to the unnecessary volatility inherent in other crypto.  They also offers users 24/7 access to the currency for safe, fast peer to peer transactions such as sending money home from overseas. 

A backbone of decentralised Finance (DeFi)

DeFi platforms like MakerDAO, Compound, and Aave rely on stablecoins to maintain financial stability within their systems. Stablecoins are a fundamental component of this decentralised finance (DeFi) ecosystem as they serve as the stable, low-volatility collateral in DeFi protocols, allowing users to borrow, lend, and earn interest without exposure to the highly volatile cryptocurrency market. 

Digital payments

Critically, NZDD will move NZ forward as a nation, giving us a digital, programmable currency that can do everything the NZD can do, but faster, more efficiently and in a way that is interoperable with the future digitisation of assets.

NZDD and PIN means you can spend the crypto with your Visa card nationwide at retail stores. 

As they continue to evolve and gain popularity, stablecoins are proving themselves as an essential part of the cryptocurrency ecosystem – offering a level of stability and predictability that their more volatile counterparts simply can’t match. 

Find stability in a volatile market

Join the digital finance movement in New Zealand.

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