The volatile nature of the cryptocurrency market is well-known. This implies that cryptocurrencies have the tendency to fluctuate dramatically, making it difficult for investors to decide whether or not to invest in a specific currency.

Stablecoins, on the other hand, addresses this problem. Stablecoins are digital currencies backed by fiat currency, other cryptocurrencies, or commodities. These make stablecoins less susceptible to fluctuations keeping their prices stable.

In recent years we’ve observed a tremendous surge in the popularity of stablecoins. What is the future of this technology and how can businesses benefit from it?

What keeps a stablecoin stable?

Fiat backing

Stablecoins that are backed by fiat currency have a 1:1 ratio. This means that one stablecoin equals one unit of that fiat currency. Fiat-backed stablecoins keep a reserve of the selected currency as collateral. Compliance is guaranteed by a third-party custodian and audits are conducted on a regular basis. When someone wants to exchange their crypto for fiat, the custodian deducts the amount of fiat from their reserve. Stablecoins of equal value are then destroyed or removed from circulation. US Dollar reserves back a majority of fiat-backed stablecoins.

Crypto backing

Other crypto assets can as well serve as collateral for stablecoins. Stablecoins are far more decentralized than fiat-backed coins in this situation. To minimize risk, such tokens are sometimes backed by a number of other cryptocurrencies. When a buyer buys this type of stablecoin, he or she locks the cryptocurrency into a smart contract in order to receive tokens with equal represented value. Buyers can then re-insert their stablecoins into the same smart contract to withdraw the original collateral amount. This sort of stablecoin is less common than more typical variants due to the complexity of the scheme. However, there is tremendous potential there.

Algorithm-Backed stablecoins

These employ an algorithmically backed way to control the supply of stablecoins. When the market price of a crypto token falls below the price of the fiat currency to which it aims to correspond, specialized algorithms and smart contracts reduce the amount of crypto tokens in circulation. New tokens, on the other hand, enter circulation when their price exceeds that of the fiat currency they track.

What problems do stablecoins solve?

Lending

There are a rising number of services that allow users to lend out their stablecoins at better interest rates than traditional providers.

Consumer purchases

Utilizing stablecoins for business transactions enhances both the efficiency and reach of e-commerce. The existing financial system — powered by fiat currencies — has its share of inefficiencies. This includes its reliance on middlemen, which often come in the form of card providers who charge high fees.

Invoicing

Companies use invoices to pay for many of their major costs. Most still rely on solutions built on top of bank transfers or credit cards to complete cross-border payments. These typically take longer periods of time to complete. Using stablecoins to pay invoices reduces transaction fees and increases execution times for businesses by removing third-party intermediaries.

Reducing costs

Stablecoins reduce the costs associated with all kinds of transactions. These costs can be;

1. Transaction fees associated with other payment methods:

For example, card transaction fees can be costly for businesses, who frequently pass these costs on to consumers by increasing prices.

2. Conversion costs from one currency to another when making remittances:

Traditional remittances are usually expensive and can take several days. Faster transactions through stablecoins could solve this problem. The non-volatile nature of cryptocurrencies also prevents volatility.

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These use cases may eventually combine to build a circular stablecoin economy. Stablecoins could be utilized entirely for all financial needs, eliminating the need for people and businesses to switch between cryptocurrencies and fiat currencies.

It’s also a system with a lower entry barrier, which may help it outgrow today’s financial system. Being at the forefront of the economy could give some businesses a competitive advantage.

How to leverage stablecoins for business growth

Although stablecoin usage by businesses still remains relatively limited today, it still promises long-term benefits.

A few things to consider before accepting to carry out business transactions in stablecoins:

• Accepting stablecoins as a payment mechanism via merchant solutions such as Fluidcoins requires very little effort.
• Payments are instant, with zero chargeback risk and improved cash flow.
• When compared to other payment options, the merchant cost is lower, resulting in reduced rates for consumers.
• It makes global commerce easier, as acquiring a stablecoin is significantly faster than setting up a bank account.

Conclusion

The adoption of stablecoins for business transactions has the potential to expand blockchain adoption beyond its current niche applications. It can also break down barriers to entry in e-commerce. However, favorable regulatory frameworks need to materialize in the next few years for us to see considerable adoption of stablecoins as a means of payment.

Read more on how you can utilise crypto to boost your business growth.