Stablecoins have had a long-running success in the crypto markets due to their ability to bypass volatility notorious in the crypto space. As they become more greatly integrated into the business and DeFi sectors, they’re also gaining a reputation for providing a lifeline to countries that have limited or irregular banking services.
Last year saw an aggressive increase in inflation rates experienced across the globe, some even leading to what is being called the cost-of-living crisis. According to the IMF, global inflation rose from 4.7% in 2021 to 8.8% in 2022, alongside a decrease in the global growth of 2.8%.
The forecast for 2023 looks better with a drop to 6.5% and experts believe that fiscal policies should alleviate the cost-of-living crisis in the coming months. Monetary policies will also work to restore price stability across the markets.
However, as consumers’ money hastily loses purchasing power many are looking for better investment opportunities that can alleviate the depreciation. While cryptocurrencies were first celebrated for being strong opposers to inflation, data does not confirm this. Stablecoins, however, have recently taken the front seat in the inflation-fighting debate.
The Power of Stablecoins
Stablecoins provide a gateway to international financial markets that were otherwise inaccessible or too costly to gain access to. Also favored for money transfers, stablecoins allow individuals and businesses to transfer funds across the globe. This spills out into the remittance markets, where families working in other countries can send money home to their loved ones in less developed nations.
Stablecoins seamlessly merge the advantages of blockchain technology (fast, secure, instant transactions) with the price stability of fiat currencies, providing an opportune digital medium of exchange.
The Downside to Stablecoins
Due to the nature of stablecoins’ value being pegged to its underlying fiat currency, stablecoins are also subject to inflation. As fiat currencies around the globe are battling against rising inflation rates, stablecoins, while digital, are not exempt from this.
While stablecoins can earn impressive yields in DeFi protocols, far better than any traditional fiat opportunities, they are still prone to losses due to inflation.
How Stablecoins Fit Into The Bitcoin Future
As outlined above, while both stablecoins and Bitcoin are digital currencies, they operate and are managed in different ways. In light of this, their adoption rates have also varied.
Stablecoins provide an easier entry to the crypto market than traditional cryptocurrencies due to their reliable pricing. Users can always be certain that their fiat-based stablecoins are the same value as the fiat they are pegged to. For non-technical users, this provides ease of mind and an easier understanding of how the crypto space works.
Stablecoins Taking On Inflation
While the general concept of stablecoins is relatively simple, the ones that are taking on inflation are slightly more complicated. Bare with us. Alongside fiat-backed stablecoins, there are algorithmic stablecoins, which use algorithms to maintain their value instead of fiat reserves.
One platform taking inflation head-on is Volt, which uses a lending mechanism alongside its native stablecoin known as VOLT. The price of VOLT remains stable by anchoring itself to the customer price index (CPI). Say for instance that the inflation rate remains at 6.5% for the year, then the price of VOLT will be kept at $1.65.
As the CPI is used by the Federal Reserve System to keep tabs on inflation and calculated by the U.S. Bureau of Labor Statistics, this index poses the most reliable insight into a currency’s real value corresponding to what people are buying.
What This Might Mean For The Future
Inflation-busting stablecoins present a new level of cryptocurrency: one that shares the advantages of blockchain-enabled currencies without the price volatility by also not being prone to inflation. Never mind a new cryptocurrency, a new type of currency entirely. Watch this space to learn more about the developments of inflation-savvy digital currencies and other impressive initiatives within the space.
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