What is the Role of Stablecoin in Cross-chain Payments?

Digital payment is revolutionizing at a great pace and bitcoin and blockchain technology are adding a new chapter to the digital payment segment. The complete virtual payment system has been driven by approx. 6000 different cryptocurrencies together. With the evolution of innovative permissionless features of crypto, it has been accepted worldwide and a sharp inclination in the market has been noticed in recent years. A plethora of finance companies have started taking the initiative in transforming their organizational architecture and operations with the help of blockchain developers in India using the latest blockchain technologies.

Despite several benefits offered by blockchain, it still has certain constraints, and volatility in cryptocurrency is one of those. To cater to the existing challenges and serve the users with a better solution, blockchain developers and designers have come up with a proper solution which is known as stablecoins. These stablecoins can be pegged to the value of any asset held by the user.

Being a new concept, a stablecoin is still an unknown factor for many and hence it requires more attention and detailing to make it more familiar to the developers as well as users. If you are also puzzled by the same aspect and are wondering to find answers to your queries then you are on the right page.

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Let’s dive deep into the world of stablecoin and cross-chain technology:

What is a stablecoin?

Stablecoin is a digital currency that can be used to peg the assets of users giving them a stable value that can be represented in dollars or gold. As compared to cryptocurrencies, a stablecoin is more potent in the blockchain ecosystem to cater to all the shortcomings and volatility issues. The reason for the volatility of cryptocurrencies is their small market capitalization which has to undergo repeated buy and sell orders with greater fluctuations.

Keeping daily trading a major concern, stablecoin has been proven as the best form of digital currency. To understand stablecoin better, they are represented with real-world currencies, such as one 1 USDT (tether) is equivalent to 1 USD. The value of stablecoin is not subjected to any market fluctuation and is always pegged with the same value. There are four different types of stablecoins, and they are:

1. Fiat-backed stablecoin
2. Algorithmic stablecoin
3. Precious metal-backed stablecoin
4. Crypto backed stablecoin

Why do traders are preferring stablecoins instead of crypto assets?

The stock market is having limitations over time, but stablecoins are not bonded with any clock or days. Traders can trade round the clock and seven days a week using stablecoins. Transactions with stablecoin are much easier because the trader doesn’t need to wait for a long period to complete the banking process, stablecoin has sped up the process.

Cross-chain technology:

Being a decentralized technology, blockchain received mass adoption right from the time of emergence but its expansion was getting limited by the blockchain network. Earlier blockchains were incapable of establishing effective communication and trading with distinct blockchains. The issue evolved and became massive with the inception of different blockchain networks having distinct types of protocols to follow.

There are several blockchain networks and each of those has been developed to give address the existing fintech industry problem, such as bitcoin was introduced to replace physical coins with digital ones. Then Ethereum was incepted to introduce the concept of the smart contract which was intended to speed up the transaction with low fees. But still, the question of interoperability existed.

Then, cross-chain technology emerged as a solution to all the above-mentioned glitches, offering an enhanced interoperability feature to establish robust and secure communication between independent blockchain networks. Besides the fact that each blockchain network is unique, they share a common infrastructure giving way to cross-chain technology for excellent transformations. Now the rapid expansion of the fintech industry with myriad blockchain networks has made cross-chain technology crucial.

Limitations of regular cryptocurrencies addressed by stablecoin:

Several blockchain networks can be used for an effective decentralized transaction, such as Bitcoin, Ethereum, and Lumens. These blockchains were successful at times and the establishment of the blockchain concept and its acceptance all across the world is crowned to the above-mentioned blockchains. But the expansion of decentralized solutions was limited and required evolution to cater to the problems to serve more effectively with flawless transaction solutions. A few of those are listed below:

1. Liquidity issue
2. Exchange rate volatility
3. Scalability of the network
4. Efficiency and stability of the network
5. Absence of conventional monetary policy
6. Anti-money laundering regulatory control lack

All the above-mentioned issues are limitations for traditional cryptocurrencies but the price fluctuations in the currencies are one of the major challenges which were ever hindering the growth of traditional blockchain networks. The price fluctuations completely depend on the market which was resulting in a 10-30 percent price fluctuation. The possibility of a sudden drop in cryptocurrency is restricting the merchants to be a part of the trade.

Future of stablecoins:

• Stablecoin is capable of bringing stability to banking operations and hence improving its core operations, infrastructure compliance, and enhancement in the user experience
• It can help the fintech industry to improve user experience and enhance trust with robust and secure solutions
• Allows cross-border payments
• Can create real-time global payments infrastructure

What is the cross-chain stablecoin payment?

The concept of cross-chain stablecoin payment is much similar to the cross-chain crypto exchange. In the context of stablecoin, users can establish a connection with different blockchains to exchange their stablecoins.

For example, if two users using different blockchain networks, such as one is using Ethereum and another is using Binance smart chain, and are willing to trade with each other in which one will be sending a tether from the Ethereum network and will be entitled to receive Binance USD from the other party involved in the transaction. Being two different blockchain networks, the exchange of two different types of currencies in a different type of blockchain network is not possible. Here comes the role of cross-chain technology, which allows two different blockchains to communicate and exchange stablecoins solving the interoperability issue and establishing a secure connection.

Cross-chain stablecoin payment is a boon for blockchain users as it allows them to mint their assets (stablecoins) and buy coins or redeem the minted assets anytime. Cross-chain enables the users to quickly convert their digital assets into stablecoins and avoid the losses occurring from market fluctuations.

Need for cross-chain stablecoin payments:

Traditional blockchains were not capable of establishing peer-to-peer connections and were involving intermediaries and hence increasing the trading cost. The cross-chain stablecoin payment system has introduced a peer-to-peer decentralized payment system that has successfully eliminated dependency on third parties and it is considered one of the most prevalent use cases of blockchain technology that holds the capability to transform the fintech industry.

Initially, blockchain was incepted with cryptocurrency transactions but the continuous growth of the blockchain industry with a wide array of currencies generated a need for an alternative to all the currencies for rapid and effective trading across various networks.

In traditional blockchains, when the transaction was initiated by a user, they were first required to deposit their stablecoins to the centralized entity and the middleman was responsible for the further transaction process. Before the inception of cross-chain technology, stablecoins were restricted to circulating within the network isolated from each other and the transactions were enabled with the help of a centralized authority.

Conclusion:

The stablecoin has ever emphasized developing high-liquidity-backed assets having less volatility. The fintech industry is growing at a faster pace and it demands rapid changes to enhance the service quality and user experience too. Integration of cross-chain platform with stablecoins and resolved several challenges of an existing blockchain network and further, it is looking for more enhancements to match the pace of this competitive financial ecosystem. Blockchain developers in Bangalore are continuously looking to develop more advanced frameworks that can address various issues of existing blockchain networks and enhance the prominence of virtual payments all across the world.