Stablecoin is a cryptocurrency designed to reduce price volatility, and are used as stores of value, unit of account and medium of exchange. There are different ways of achieving this stablecoin price stability, and the value of stablecoins can be pegged to fiat currency, collateral or a mechanism.
Some stablecoins are traded for a little less than 1$ like Tether according to Hackernoon, but that isn’t supposed to be the standard; the standard for fully-backed stablecoins should be 1 stablecoin is equivalent to 1$ dollar (or whichever other fiats) reserve in the bank. Some are converted directly to USD, and others manipulate their own token to change its values towards 1$ dollar during ups and downs.
Stablecoins backed by reserved assets are striving to offer the best of both worlds with the convenience of instant processing and the security of cryptos, as well as the stability and volatility-free valuations of the fiat.
And Algorithmic Stablecoins which rely on a mechanism that changes the price of the stablecoin so it can follow the price of the fiat currency are striving to survive the momentaneous cryptocurrency volatility without relying directly on a reserve.
Bitcoin, November 2017- $5,950; December 2017 — $19,700. Wow! This kind of short-term volatility makes cryptos inadequate for daily use, which may keep a lot of people from investing in it.
Mediums of value should be able to remain relatively stable over extended periods of time and efficiently translated into prices.
So stablecoins have come to give the crypto market some level of stabilization and support people to spend and use their tokens on a daily basis without fear instead of saving them. It is also trying to become a bridge between fiats & cryptos.
Fiat — Collateralized Stablecoins / Centralized Stablecoins
Such reserves are frequently audited for adherence to required compliance and controlled by autonomous custodians. They can be backed by popular USD reserve, Gold, Silver or commodities like oil. E.g. Tether, TrueUSD(TUSD), PAXOS Standard (PAX), Gemini Dollar (GUSD), and more.
· The Value is pegged to a fiat currency like most popular USD, EURO and Swiss Franc;
· The tether is effectuated off-chain, through banks and other regulated financial organizations that serve as depositories of the currency used to back the stablecoin;
· The amount of the currency used for the backing of the stablecoin has to reflect or match the circulating supply of the stablecoin.
Crypto — Collateralized Stablecoins / Decentralized Stablecoins
These stablecoins are entirely crypto-based: Cryptocurrency that is backed by cryptocurrency. Due to the fact that the reserved crypto is also inclined to high volatility, it is necessary to OVER — COLLATERALIZE. In other words, a substantial amount of cryptos is kept as a reserve for a lower amount of Stablecoins. E.g. MakerDAO´s DAI
Technically these coins are more complex towards the stability mechanisms, it has more risks due to bugs in the smart contract code, but it also has advantages when it comes to transparency and decentralization.
• Peg performed on-chain via smart contracts;
• Supply is monitored on-chain using smart contracts;
• Price stability is achieved through the introduction of additional instruments and incentives, not just the collateral.
NON-Collateralized Stablecoins / Algorithmic Stablecoins
Algorithmic Stablecoins do not use any reserve but include a working mechanism like a central bank to retain a stable price.
The supply of algorithmic Stablecoins is typically controlled by issuing and destroying coins depending on the market´s demand until the target price is reached. They use consensus mechanism to increase or decrease the supply of tokens on a need basis, just like central banks printing notes to maintain valuations of fiat.
This can be achieved by executing a smart contract on a decentralized platform that can run in an independent manner.
· Full decentralization;
· High Scalability;
· Peg is on-chain;
· Inexpensive, as they require no collaterals.
Volatility has been haunting crypto traders since the beginning of its existence, it is a factor, that keeps an extensive group of people from investing and adopting the technology.
Volatility equals to fear, and fear is contagious.
Crypto traders confidence has been epidemic in getting others involved, but for the more traditional traders and investors like Warren Buffet, for example, volatility generates insecurity, and for such traders, stablecoins were born.
In my opinion, it all seems so dubious and confusing, and to have tokens backed by dollars which are backed by nothing and are on some serious forecasts of collapsing, is just pointless in the long term, it is not sustainable. Now, the Algorithmic Stablecoins seems a bit more reasonable since it relies on adjusting the actual tokens to follow the fiduciary market, but then again it’s a solution for the time being since relying on fiat isn’t realistic in the long-term.
As of now, it might be a reliable solution to have coins that derive their value from fiat currency but only until cryptos become stable on their own.
“Blasphemy! Heresy!” come the cries from the crypto-originalists, the hard core in the community who hopped on board this careening bandwagon in the conviction that cryptocurrencies were invented to replace fiat money, not coexist with it. And there is plenty of legitimate criticism to be leveled at “stablecoins.” Some say the concept as a whole simply isn’t viable. — Mike Orcutt MIT Technology Review
What do you think?
Let us know your opinions! Do you trust Stablecoins? Would you invest in Stablecoins? And if you would tell us which ones and why!
Disclaimer: Our team works hard to bring you the best content in the cryptocurrency market, but it is only our point of view and not legal advice, and may be divergent from other opinions, so please do not make any decisions without concluding studies of your own to understand the profit possibilities and uncertainties involved at your own risk.