What is a stable coin?
A stable coin is a Cryptocurrency type that has value tied to an asset outside, like gold or the U.S. dollar, to stabilize its price. Cryptocurrencies like Ethereum and Bitcoin offer numerous benefits and one quite fundamental one is not involving or necessitating trust in an intermediary entity in sending payments, opening up their significance to any person on the globe. Stable coins strive to counter price fluctuations by tying the cryptocurrencies’ values to various stable assets-normally fiat. It is (FIAT) currency issued by government that everyone uses every day, like Euros and dollars and it tends to remain stable over time. Usually, the institution behind it sets up a reserve where it securely keeps the asset that backs stablecoin. When stablecoins come in the form of digital money, they target mimicking, traditional and stable currencies. Generally, stablecoin is a kind of crypto which is collateralized using the value of an underlying asset. The underlying asset may vary from a coin to another. Most stablecoins are pegged at a 1 to 1 ratio with fiat currencies like the Euro and the USD that can be traded on exchanges. Other stablecoins are linked to other asset kinds like gold or other crypto like ether.
Different Types of Stablecoins
Fiat-collateralized stablecoins are the most common and they are backed by fiat currency such as the EUR, GBP or USD. Fiat-backed stablecoins are equated at a 1:1 ratio with a single unit of currency like a dollar. That means that for any stablecoin in existence, there is actual fiat currency held in the bank account to back it up. Whenever anyone wants to redeem cash using their coins, the institution managing the stablecoin takes the amount of fiat from their wallet then will send it to their bank account. The stablecoin equivalent to the fiat is then removed from circulation or destroyed.
Fiat-collateralized stablecoins are the basic structure that a stablecoin can possess, and this kind of simplicity has massive advantages. One can easily understand, especially those new to Cryptocurrency, which allows for enhanced adoption of stablecoin technology. Provided the country’s economy that a stablecoin is pegged to remains stable, the value of the collateralized coin will remain steady too. It actually means that when the entire crypto-economy collapses and the Bitcoin price goes to $0, the fiat-backed stablecoin will not be affected.
Examples of Fiat-collateralized stablecoins
Tether (USDT) is the most popular stablecoin that is currently ranked 3rd on the Cryptocurrency market. It has the largest trading volumes per day of any other crypto, including Bitcoin. Tether is a true reflection of the global stablecoin supply and set its new record at the start of 2021 through the issuance of 2B tokens in a week. However, there is plenty of controversy surrounding this Cryptocurrency. Major suspicions arose that Tether issued excess USDT than its USD reserves backed. The Department of Justice in the US, consequently, investigated the claim for any potential manipulation of the market. The suspicion of the apparent misuse of Tether’s reserves has seen a rise of many new fiat-collateralized stablecoins to take Tether’s place. The USD Coin is one such example, which also has the backing of the US dollar and is managed by Circle and exchange Coinbase. The reputation of USDC as a stable asset that is regularly audited has helped it grow into a critical Decentralization Finance (DeFi) component, a wide range of decentralized financial services relying on smart contracts and blockchains. Moreover, in Dec 2020, Visa started a partnership with USDC to issue credit cards using USD Coin as currency. Two stablecoins backed by USD were approved and regulated by the “New York State Department of Financial Services”- this proves further that the invasion of stablecoins is slowly taking off. The Gemini Dollar (GUSD) and the Paxos Standard (PAX) became the regulated cryptocurrencies in the world, in September of 2018.
They are backed by other forms of interchangeable assets like precious metals. The most common one is gold; however, some stablecoins are backed by real estate, oil, and various forms of metals. Commodity backed stablecoin holders essentially seize a tangible asset with real value- a unique feature that most cryptocurrencies lack. The commodities have the potential of creating value as time progresses. This gives enhanced incentive for individuals to hold and make use of the coins. In the case of such coins, anyone on the globe could invest in real estate or gold in Switzerland. Some assets kinds have solely been reserved for the rich, but stablecoins are platforms for new investment possibilities to average people globally.
- Digix Gold (DGX), for instance, is an ERC-20 token built on the Euthereum blockchain network and backed by gold. Here, 1 DGX is equal to 1 gram of physical gold. The gold is stored in the Singapore vault and gets a quarterly audit to ensure there is transparency. The DGX creators claim to have made access to gold “democratic”. The DGX holders may choose to actually redeem the actual bars of gold. They simply go to the Singaporean vault to effect the redeeming.
- Tiberius Coin (TCX) is another that is not only backed by a sole commodity, but by combining 7 precious metals majorly used in blockchain technology hardware. The idea is that the metals are progressively used in making technology like electric cars and solar panels. TCX coins will elevate in value. SwissRealCoin is another instance, which is backed by Swiss real estate portfolio. Token holders can democratically vote on the choices of investment.
- They are stablecoins that are backed by cryptocurrencies. It allows crypto-backed stablecoins to be centralized that their fiat-backed counterparts because everything is conducted on the blockchain.
- To reduce the risks of price volatility, the stablecoins are usually over-collateralized so that they entirely absorb collateral price fluctuations. For instance, to get stablecoins worth $500, an individual would need a deposit of $1000 of Ether (ETH). In such a scenario, the stablecoins are at 200% collateral, and can adequately withstand a drop in price, for instance, of 25%. It would still mean that the $500 stablecoins worth is adequately collaterized by ETH worth $750. When the underlying Cryptocurrency price drops low, the stablecoins will mechanically be liquidated. stable coins that are Crypto-colateralized are sufficiently decentralized, allowing some financial processes to be secure, trustless, and completely transparent.
- There is no entity that controls the funds of individuals. More so, they are backed by numerous cryptocurrencies to distribute risk. They enjoy excess liquidity, meaning they can swiftly and cheaply converted into their triggering asset.
- Stablecoins that are crypto are majorly complex kinds of stablecoin, which means they do not have adequate traction since they continue to create their kinks. The most promising and popular example of collateralized crypto is Dai, a creation of MakerDAO. It is a stablecoin which has a face value linked to USD but is actually backed by Euthereum which is locked up in smart contracts. Just like USDC, it has become crucial to many applications of DeFi. Moreover, by nature of being decentralized, everyone can generate, sell or buy Dai. Developers particularly can effortlessly build some decentralized Dapps, apps, on each Euthereum blockchain by use of a medium of exchange that has immense stability.
They are backed by anything that might seem contradictory given the stablecoins. The coin types use some algorithmically governed approach in controlling the supply of stablecoin. It is a model referred to as seignorage shares. As demand enhances, new stablecoins are created in reducing the coin price back to its normal level. When the coin is trading low, the coins on the crypto market are brought up to reduce the supply that is circulating.
Some stablecoins are not equal to others. With the growth in the number of stablecoins, it is proper to have a grip on the most important and well-anchored options. Below is a list of some stablecoins:
- Tether (USDT)
This coin tethers itself to the USD value. It is among the best known stablecoin crypto in the world. It has the backing of gold, cash equivalents and traditional currency. Tether has immense security and integration that is smooth with crypto to major fiat platforms.
- True USD (TUSD)
It is also characterized as TrueUSD and is 100% supported by the dollar and is among the best market liquid stablecoins. This coin tenders lower costs of transactions that wire fiat currency transfers and higher rates of interests on kept balances.
The firm behind TrustToken, True USD also has stablecoins attached to other chief currencies- TrueGBP, TrueAUD, and TrueHKD among others.
- Paxos Standard (PAX)
It aims at keeping a 1:1 equivalence with the dollar. It was crafted as a solution to the printing controversy of Tether that saw Tether come under criticism for some unverified claim that it hoarded $1.8 billion with Trust Ltd & Deltec Bank to support its stablecoin.
- USD Coin – USDC-
It is a stablecoin supported by Coinbase, the globe’s largest Bitcoin and largest Bitcoin exchange holder.
- Binance USD– (BUSD)
The crypto exchange also released some Binance USD that is pegged to the U.S dollar to 1:1
Why Stablecoins Have Value?
- Price stability- stablecoins are designed to have stability over time. Most crypto investors and geeks consider then quite an ideal asset of safe-haven. The fiat money value and that of major cryptocurrencies are experiencing dramatic plunges and spikes every day that is why stablecoins are a superb option for individuals seeking ways to preserve and protect their wealth. They do store their wealth in an asset without seeing any risk loss because of inflation.
- Decentralization and privacy- stablecoins are a crypto type that means they share the same powerful systems and technology which runs thousands of other crypto. However, while cryptocurrencies are decentralized in nature, it might be a requirement for ties the banking system’s fiat currency. It is a good start for individuals who can’t fully invest in crypto yet.
- Programmable currency- they are quite programmable and may be designed to fit the needs of the users since they are basically an invention of codes.
Stablecoins Use Cases
Stablecoins are used in a similar manner as usual Cryptocurrency in the provision of additional benefits in given situations. They are applied in the storing of funds and completing regular transactions, supporting peer-to-peer payments, and creating more value to the exchange of crypto. They are a great asset whenever it comes to the mitigation of the side effects in the Cryptocurrency aftermath crash.
- Countering damages that are brought up by instability in the market
One of the actual world stablecoin applications is for minimizing of the losses caused by crypto with volatile qualities. Investors can swiftly trade the failing or dead crypto for asset-backed or fiat-backed stablecoins in a bid to protect the holding value. Trading volatile crypto for stablecoins is equal to investing in assets like minerals of value such as gold and keeping them in vaults when markets are unpredictable. In this blockchain technology world, stablecoins supply traders with a safe harbour making them reduce the risks without leaving the Cryptocurrency ecosystem.
- Daily transactions-
Like other actual fiat currencies with the support of wallets of stable coins, a stablecoins wallet can be crucial for casual transactions like buying coffee and transferring cash to family and friends and making overseas payments. Stable coins could be the most effective method of making major inter-country cash transfers in a joined-up and cheap way.
- Periodic payments
Smart financial contracts are made able by using stablecoins and are enforceable over time. The contracts are self-executing digital contracts with conditions and rules programmed into the contracts. They are a great fit for recurring payment automation. Stablecoin transactions are traceable, transparent and irreversible, making them quite ideal for loan and salary payments, and subscriptions. For instance, an employer can entirely deploy a given smart contract that automatically transfers stablecoins a payment to their employees every end month.
How Are New Stablecoins Created?
Stablecoins can be created by considering the steps below.
- It is crucial to establish the kind of stablecoin to develop
- Identify the technology and platform needed to build stablecoin
- Before creating a token, think about liquidity maintenance
- Creating technical and visual designs of the stablecoin system
- Development and integration of the prevalent Blockchain Platform
Why Have Stable Cryptocurrencies Become so Popular?
Stablecoins are not volatile and wild like other cryptos like Bitcoin. They are often pegged at a 1:1 ratio to stable currencies lie the U.S dollar, which serves as its collateral.
How to Get Stablecoins
Individuals can earn stablecoins through working on ventures within the ecosystem of Ethereum.
Pros & Cons of Stablecoins
a) Non-collateralized stablecoins require no collateral, and they have transparency and auditability.
b) Crypto-collateralized stablecoins are decentralized and resistant to censorship. It also has no counterparty risk, locality and geopolitical risk.
a) Collateral backing volatility of the stablecoin may destabilize the peg. Crypto-collateral stablecoin has inefficient capital use, and less price stability than fiat.
b) Non-collateralized or algorithmic stablecoins have experimental fallback procedures and need continuous growth to actively maintain its peg.
As much as most governments have promoted the issue of the right to issue money being duly within their individual decisions, the issue of crypto cannot just be ignored. The future of crypto might still be challenging to tell but the direction that stablecoins has taken will see it have a magical impact on the crypto world.