Good day! It's another brighter day and I have learnt about an important terminology in the crypto space which I would love to share with you. It's all about stablecoins, I hope you will love to read about it.
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If you deal with cryptocurrencies, you will know the importance of stablecoins. They help crypto traders and investors in so many ways. Generally, the crypto market is driven by market forces. That is why most of the crypto assets are volatile in nature as their prices change with respect to demand and supply.
BTC for instance, was trading around 60k two months ago, but now it is struggling around 40k. This is applied equally to other crypto assets like ETH, STEEM, BNB, and many other coins. Their prices can fluctuate in a matter of minutes since they are not widely adopted and regulated.
Stablecoins, on the other hand, have remained stable by avoiding the slight volatilities, and this is due to additional stability algorithms that have been implemented. This keeps them stable in the market. They are easy to buy, and we can buy them with the unstable coins on most of the crypto exchange platforms to avoid volatility in our day-to-day transactions.
Stablecoins are another form of crypto currency. They are pegged with other assets with additional algorithms on a blockchain network to keep them stable. This makes them capable of acting as a medium of exchange for our day-to-day activities whilst being decentralized, convenient, and secured. There are different ways through which stablecoins are able to deliver their price stability.
Stablecoins like USDT, USDC, TUSD, and UST are pegged in 1:1 ratio with the USD. They maintain their values with respect to the USD, so they are always equal to 1 USD. People who want to store their money on the blockchain but do not want their investment to be affected by the frequent price fluctuations can use any of these coins to keep their investment stable but in a decentralized and secured manner.
These USD stablecoins are backed by fiat collateralization to keep their stability. This means that each single coin is backed by a US dollar with a financial service provider like a bank. Tether (USDT) is the most widely used USD stablecoin, even though there is a controversy concerning its collateralization.
Although the colleteralization manages to keep the coins stable, the fact is that it is nearly impossible to invest the amount of money required for each single coin/token like USDT. That is why it is very difficult to prove the ownership of the total amount of the cryptocurrency. This is applied equally to other fiat based stablecoin tokens like EURt, BitEUR, xEUR, and CEUR for the Euro, XIDR for Indonesian Rupees, and many others. They all maintain their values with respect to the pegged fiat currency.
Another way in which most of the stablecoins are kept stable is through the use of smart contracts. Instead of collateralizing the token with a centralized financial service provider, the smart contract stablecoins are kept stable with the help of smart contracts.
Many stablecoins are now kept stable with the help of smart contracts, the most popular and oldest of which is MakerDAO's DAI stablecoin.They are often referred to as "algorithmic stablecoins" as they are managed by algorithms with smart contracts. They use the technology of minting and burning to keep them stable.
They are more secure than the fiat-collateralized stablecoins as they are directly built on the blockchain, making them difficult to steal. A major drawback of algorithmic stablecoins is that they are sometimes volatile as they have to react to price changes when demand or supply is higher.
Also, some stablecoins are pegged with other commodities to keep them stable with respect to the pegged commodity. XAUT and PAXG, for instance, are pegged to gold and their value is relative to that of gold. There are many other coins of this nature, and their rises and falls are tightly tied to the commodity.
The fiat and commodity pegged stablecoins are usually managed by centralized agencies, which help to maintain their stability by putting in measures to make sure the ratio remains 1:1 through the use of demand and supply mechanisms.
Conclusion
Stablecoins have increased the adoption of cryptocurrencies as it has made it possible to keep our crypto assets stable. Employers can now pay their workers around all corners of the globe in a cheap and convenient manner with the use of stablecoins.
People who don't want to be affected by price volatility can also decide to invest in any of the stablecoins with suitable interest. We can also use the stablecoins as an exit strategy during a market crash to buy back at lower price levels. Stablecoins in general help investors a lot despite the controvesies that are incured on them with regards to their colleteralization.
I will stop here and continue next time with the next terminology. Don't hesitate to correct me when you spot an error in my content as I am still a learner. Thank you for your time.
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Also posted in Cryptocurrency Terminologies Part 3- Stablecoins
