What are Stablecoins?

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Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets.

So what does stablecoin mean really?

A stablecoins are pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).

What are Stablecoins? 1

Stablecoins are very important for saving values, while investing and saving your crypto assets for future profit.

Basically, stablecoin creation is an attempt to keep cryptocurrencies away from the continuous volatility of the market (i.e. continuous changes in the entire market value of crypto coins).

How many Stablecoins are there?

There are 4 different types of stablecoins available in the cryptocurrency market. Below are the list of all the types of stablecoins in the space currently:

1. Fiat backed stablecoin

The most common type of Stablecoins is collateralized or backed by the fiat currency.

Note: Fiat is paper money in your wallet and the digital money in your bank account.

Examples of fiat money include; NGN, USD, EUR, GBP, CHF, and JPY etc.

Fiat-backed stablecoins is backed at a 1:1 ratio, meaning that $1 of a stablecoin is equivalent to $1 of fiat money.

So for each stablecoin that exists in this category, there is real fiat currency being held in a bank account to back it up.

2. Commodity backed stablecoin

A commodity-backed stablecoin is a digital currency whose value is determined by a real tangible asset. These assets may include gold and other precious metals.

This type of stablecoins is backed by commodities (A valued exchangeable goods or materials).

These commodities may increase in value over time. And this increase gives more rewards to people who hold and use them.

Commodity holders can redeem and take possession of their asset but it will take days to do so.

3. Crypto backed stablecoin

This Stablecoins is backed by other cryptocurrencies such as bitcoin and ether. In this case, the use of central depositories such as banks is avoided.

This allows for decentralization (having no central authority) since everything is done on the blockchain.

4. Seignorage stablecoins

Seignorage is the only category of stablecoins which is not backed by any asset.

Seignorage coins operate with an algorithmic (accurate step by step) governed approach, just like a central bank that prints more bills.

As the total demand for this coin increases, new supplies are made. This is to reduce the price back to stable levels.

What is the best stablecoin?

There are good number of stablecoins in the cryptocurrency market. Below is the list to most of them:

Tether (USDT)

A well-known or most popular fiat-backed stablecoin is the currency Tether (USDT). Tether is backed by the US dollar, Euro (EU), and the Japanese yen (JP). Its market capitalization is about $4B at the time of writing.

Tether is issued by a company called Tether Limited. It was launched as RealCoin in July 2014 and was rebranded as Tether on 20 November 2014. Tether is also the 3rd biggest coin in terms of the daily trading volume.

Tether is designed to offer stability (like fiat currencies), transparency and lower transaction charges to users.

True USD (TUSD)

TrueUSD (TUSD), is a popular stablecoin that was introduced in early 2018. It was designed to be simple, transparent and reliable. For this reason, it does not use a hidden bank account.

It is also backed to the US dollar at a 1:1 ratio, which is 1 TUSD represents 1 $.

TrueUSD was created as an alternative to Tether due to controversy on the transparency of Tether totally back by fiat.

TrueUsd is the first major project built on the TrustToken platform (TrustToken is a platform to create asset-backed tokens).

TUSD was first traded on Bittrex but has expanded into other exchanges which include Binance, CoinTiger, Upbit, and more.

Digix Gold Token (DGX)

DGX is an ERC-20 token backed by physical gold. Each DGX token represents 1 gram of 99.99% LBMA standard gold.

This gold is stored in a vault in Singapore, known as The Safe House. And every 3 months the gold is being adjusted to ensure transparency (accuracy).

DGX is created by a company called DigixGlobal. The Digix team was formed way back in 2014. The value of each DGX token is fully determined by the market value of gold.

To redeem the physical bars of gold, DGX holders will have to travel to the vault in Singapore to do so.

Dai (DAI)

Dai is a crypto-collateralized asset. It is an ERC-20 token that is created by MakerDao. It is pegged to the US dollar to a 1:1 proportion meaning that 1 Dai coin equals 1 USD.

Dai is a cryptocurrency that runs on the Ethereum blockchain and based on this fact DAI is a decentralized cryptocurrency.

Basis

This coin was formerly known as ‘Basecoin’. Basiscoin is a cryptocurrency that its value is backed by the US dollar. This is done through algorithmic adjustments of the coin’s supply.

Price stability is achieved through the monitoring of various exchange rates. If basis coin is trading above $1, and new stablecoins are created and distributed.

If Basiscoin is trading for less than $1, base bonds are created and sold.

Paxos Standard Token (PAX)

Paxos standard token is a fiat-backed stablecoin whose value is backed to the US dollar in a 1:1 proportion. PAX is a cryptocurrency that is regulated and approved by New York State Department of Financial Services.

As an ERC-20 standard-based token was developed by Paxos Trust Company. Paxos token can be received and sent by users of an Ethereum wallet.

Pax is also available 24/7 to ensure payments or exchanges of any type of asset.

USD Coin (USDC)

USD Coin is a fiat-backed stablecoin which is backed by the US dollar. This coin is the product of an open-source technology called CENTER.

USD Coin is an ERC20 token built using the Ethereum blockchain. USD Coin allows people to use US dollars without requiring a bank account or a specific geography.

This coin is regulated, transparent, and verifiable.

Stable USD (USDS)

Stable USD (USDS) is a fiat-backed or collateralized stablecoin created by Stably. Each Stable USD token is transparent, legally backed and redeemable for a US Dollar.

Stable USD tokens are held in an insured escrow account managed by a trusting custodian, such as Prime Trust.

By making Stable USD redeemable and pegged 1:1 with US dollars, we can eliminate volatility.

Real-world usages

Despite the fact that stablecoins are still in their early stage, they have many potentials to the real-world applications.

Below are the real-world usage and application of stablecoins:

Day-to-day usage

Stablecoins can be use for every other day transactions, including buying of pizza, buying things from Amazon and similar marketplaces.

These coins can be used like any other currency for day-to-day purposes.

Recurring P2P payment/charges

Stablecoins allows usage of P2P (peer to peer) smart contract payments. In this way, no third party is needed.

This is beneficial for businesses that have employees all over the world because it reduces fees and long process.

Protection from local currency crashes

Undoubtedly, local currencies normally reduce in value, citizens like you and I could exchange our money to Euro or US dollar to retain its purchasing value.

Likewise, we can convert our fiat currency to commodity-backed stablecoins like gold due to its high stability in value.

This protects our life savings from further drops in value.

Cheaper remittances

People travel around the world, and most of the times, they have families that requires their financial help.

Stablecoins makes it very easy to remit money from one country to the other and it also enable affordability of the whole process.

Limitations of stablecoins

While stablecoins present many advantages, they still have their limitations. Fiat-backed stablecoins is centralized, therefore, trust is extremely required.

Commodity-backed stablecoins, traveling to Singapore is expensive, and could take months to redeem your physical gold.

Crypto-collateralized stablecoins that is backed by cryptocurrencies. Since cryptocurrencies usually fluctuate in value this can also be a problem.

The base system of Seignorage style stablecoin is complex and difficult to understand, so investing or saving value with such token can lead to loss of your investment.

How safe are Stablecoins?

Backed stablecoins are subject to the same volatility and risk associated with the backing asset.

If the backed stablecoin is backed in a decentralized manner, then they are relatively safe from predation, but if there is a central vault, they may be robbed, of suffer loss of confidence.

Are Stablecoins a good investment?

If a stablecoin is pegged to the U.S. Dollar, you are forcing it to be a relatively bad investment because its value derives entirely from a relatively bad investment.

Yes, the U.S. dollar may be less volatile than many crypto-assets, and indeed many other fiat currencies, but it’s still not as stable.

Is Bitcoin a Stablecoin?

No… Bitcoin is not a stablecoin. It is not backed by anything in fact.

Bitcoin has grown in value, because people see the value of a decentralized currency, and supply and demand has taken care of the rest.

Stablecoin is a cryptocurrency that is becoming a trend, and still tries to be the best competitor of Bitcoin in some ways like keeping value of other digital assets away from price fluctuations.

Are Stablecoins decentralized?

Not all stablecoin though, it is just the crypto-collateralized stablecoins that are decentralized, allowing processes to be even more trust-less, secure, and completely transparent.

Can you mine Stablecoins?

Yes, You Can Mine Stablecoins. Stablecoins are all the rage, and everyone’s trying to become the next Tether.

Although, these tokens have their value fixed, that doesn’t stop people from trying to get money out of them: Uphold lets users lend out their tokens for (potentially) better interest than a savings account, and Gemini dollars reached 120 cents on some exchanges.

And Kowala, an algorithmic stablecoin system backed by math and code, has opened the public sale of its mining coins, which will allow the public to maintain the network in exchange for dollar-valued tokens.

Are Stablecoins stable actually?

Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets.

Volatility of the crypto market can be discouraging most times, especially when you don’t want loose money as you loose values of your cryptocurrency investment.

Every stablecoin usually has a pegged value to its underlying asset, so most crypto traders usually save their digitally invested assets from loosing its value within time with these stablecoins.


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