What You Should Know About StableCoins?

https://medium.com/coinmonks/what-you-should-know-about-stablecoins-cf2a00ac610b?source=rss----721b17443fd5---4

A coin with reduced volatility called stable coin which is suitable to use for daily use but still there are many things you don’t know about stable coins.

Techfrry

After bitcoin, so many cryptocurrencies launched and if you check coinmarketcap, you can find thousands of cryptocurrencies listed there. Majority of coins are highly volatile, which makes them suitable to investment but for everyday use stable coins come into work.

In this article we will read some important things about stablecoins and learn its impact on economy.

If you compare stable coins with other coins then if other coins are roller coaster then stable coins are the toy train.

Some stablecoins created by collateralized which means fiat back the stablecoin so when some stable coin comes into circulation then same amount of fiat get deposited somewhere in the bank.

Stablecoins are nothing but the digital fiat created over blockchain technology so let’s dive deep about stablecoins {Reference}.

in 1996, E-gold was launched by Gold & Silver Reserve Inc. where users account denominated by grams of golds so can one user able to transfer value to other users easily but after some time it stopped working because of legal issue {Reference}.

In 2006, again, a stable coin service started with the name Liberty Reserve in Costa Rica. Where users can create an account and transfer money with only a name, email address, and date of birth. Liberty Reserve USD and Liberty Reserve euro were pegged to the US Dollar and Euro, respectively, but in the money laundering case the company was shut down in 2013 by the US Government{Reference}.

We have no data that how many stablecoins launched and shutdowned in the past, but today’s stable coins are in much better position.

1. Everyday purchases and payments

2. Cross-border transfers

3.Stable trading asset

Stablecoins provide you flexible entry and exit to crypto market without converting your crypto into fiat which can charge high fees.

4.Protection from fiat inflation

Brutal inflation in Venezuela. Graph courtesy of Statista/IMF

1. Asset-Collateralized Stablecoins

Basically, Asset-Collateralized Stablecoins backed by three types of assets: 1. Fiat currency, 2. Commodities, 3. cryptocurrency, so let’s learn more about them.

  1. Fiat-Collateralized Stablecoins

Each amount of fiat collateralized new stable coins printed, which means if $1millions of stablecoin is in the circulation then there should $1millions of fiat reserved somewhere and when you cash out your stablecoins, then the amount you cash out get paid from the reserve and the stablecoins get destroyed.

Tether is the top stablecoin with rank three in coinmarketcap by market capitalization but Bitfinex, the company behind Tether, revealed last year that only 74% of all Tether backed by cash and securities. This is the point of concerns with fiat-backed stablecoins — I.e. trust in a central entity {Reference}.

The most advantages of using fiat-backed stablecoins are it is very simple to understand and to use because people are very familiar with fiat systems but the most disadvantages of fiat-backed stablecoins because these are created on the top of centralized system which means single point of failure, trust issue comes into place because you don’t know they are properly reserving fiat or not, Regulatory oversight, and Inefficiency.

2. Commodity-Collateralized Stablecoins

commodity-collateralized stablecoins backed by commodities like gold, real estate, and oil.

It gives you access to buy commodities in a fraction because, in reality, you can’t buy gold or oil in fractions and you need not think about the security of your stored gold because it is in the digitalized form so you can store them in cold storage for long period and commodities backed stablecoins are stronger to fight inflation than fiat-backed stablecoin.

But the disadvantages of commodities backed stablecoins are similar to fiat-backed stablecoin {Reference}.

3. Crypto-Collateralized Stablecoins

The concept of crypto-collateralized stablecoins is more interesting because it gives you permissionless decentralized ecosystem because these stablecoins are backed by cryptocurrency.

Everything built on the blockchain so no trust issue comes into place, and you will never face the disadvantages you face in fiat- and commodity-backed stablecoins. but cryptocurrency prices can be volatile and to absorb these price fluctuations and mitigate risk you may face over collateralize problem, which means you may force to deposit $150 of crypto to get $100 stablecoins {Reference}.

4. Non-Collateralized Stablecoins

This is the stablecoins don’t use any collateral to back them and the concept of non-collateralized stablecoins are inspired from fiat system because you know fiat currencies are not backed by any tangible assets but by faith of the people.

The primary category of non-collateralized stablecoins is algorithmic stablecoins. Also known as the “Seigniorage Supply” model where its algorithms and smart contracts to balance supply and demand means when demand of the coin increase more coins generate and when demand decrease it buy these coins in circulation.

The above model failed and algorithmic stablecoins include Nubits, BitBay, and others, most of which either haven’t gained traction or shut down.

Now Meter is creating a stable coin which is called “economic consenus-based” stablecoin which uses the profit-seeking behavior of Proof-of-Work miners instead — and is immune to many of the drawbacks of algorithmic stablecoins.

These are the most decentralized stablecoins of till now because most of the infrastructure created on the blockchain, they don’t need collateral but it also has some disadvantages is that algorithmic stablecoins rely on continual future demand in order to be successful{Reference}.

5. Hybrid Stablecoins

These kinds of stablecoins are a combination of multiple aforementioned models, which means it combines of fiat-collateralized, commodity-collateralized, crypto-collateralized, and algorithmic — into a single token.

These coins combine characteristics of over one coin which is can attract users and investors but may be complex to understand for some people and also be scrutinized by regulators if they involve any aspects that resemble securities {Reference}.

Also, Read

Get Best Software Deals Directly In Your Inbox