Stablecoins what are they and how do they work? Let us help you with this question by explaining a few important things you should know about them. After the launch of Bitcoin ten years ago, the market saw the emergence of several altcoins, including Ethereum.
Many of us have fantasized about how much money we would have if we had purchased $1,000 worth of Bitcoin at the correct time. Moreover, this is due to the fact that Bitcoin, like Ethereum, fluctuates with the price of assets depending completely by market supply and demand. Because they are not supervised by a central body and are not recognized as state money, the prices of these coins may change.
But, is there a safe escape to avoid this instability, and if so, how does it work?
We present you with Stablecoins
Stablecoins are cryptocurrencies with regular US dollar prices. Thanks to these dollar-indexed coins, you have the opportunity to maximize your chances of protection from market fluctuations or risks. Let’s take a short look at a few prominent Stablecoins:
- Tether (USDT)
Exchanges: Binance, OKex, Huobi and many more
Market Cap: $1,884,587,370
- TrueUSD (TUSD)
Exchange: Binance, DigiFinex, Bit-Z
Market Cap: $213,749,697
- MakerDAO (DAI)
Exchange: HItBTC, KuCoin, OasisDEX
Market Cap: $56,801,526
- … and more
How do Stablecoins affect cryptocurrency prices?
Private organizations launch cryptocurrencies and are bound by political, social, or economic indicators. However, these currencies, which are solely dependent on market supply and demand, can be highly unstable.
This instability, poor and undefined regulations causes lack of public trust in cryptocurrency as a reliable and balanced currency option. That’s why most people still view crypto currencies as speculative investments.
Given this, people tend to resort to safer options like Stablecoins for withdrawal purposes. As we know most of the world’s wealth is now in the hands of the 1%. Same goes with cryptocurrencies, because 20% of all Bitcoins are owned by 448 people. These people, called Whales, influence the prices of cryptocurrencies. If these people would convert their crypto assets into Stablecoins, the price of cryptocurrencies would fall, or vice versa. That is why the price of cryptocurrencies is highly dependent on whales, and therefore on Stablecoins.
How do they work?
Stablecoin is a cryptocurrency with a fixed value. This means that the value of the cryptocurrency should not change frequently, as it does in unstable crypto assets. Although this fixed price range is often tied to the US dollar, there are also other alternatives.
Stablecoins can theoretically be fixed to nearly anything. That’s why there are some of them fixed to numerous fiat currency and even precious metals such as gold or silver.The decisive factor for Stablecoins is how the price’s stability is maintained and what the whole system is based on.
How does they maintain the stability of their currency value?
Some central Stablecoins, such as Tether, need the use of a custodian to regulate the currency and hold a specific amount of collateral. Tether keeps the US dollar in a bank account, and the quantity held must be equivalent to what they issue in order for the system to function properly. This is what keeps prices stable.
However, other stable decentralized cryptocurrencies, such as Dai, achieve this purpose without the need of a custodian. To manage the collateral and keep order, they use smart contracts on the Ethereum blockchain.
Three known categories of Stablecoins
Based on design, we can split Stablecoins into 3 major types:
This is the simplest version, with each Stablecoin currency produced in that currency. That is because the coin’s production and liquidation are handled by the coin‘s issuer. Price remains stable because for every stablecoin issued, 1 US Dollar is reserved in a bank account, which is redeemable all times.. The only issue is that it is dependent on the issuing party being properly regulated. Well-known Fiat-Collateral Stablecoins:
- Tether — USDT
- TUSD Gemini
- GUSD Paxos
This version, as the name implies, uses other cryptocurrencies (e.g., ETH) as collateral for the stable coins. However, because crypto prices are unstable, these Stablecoins must employ a series of procedures to ensure that the price of the stablecoin remains at $1. Well-known Crypto-Collateral Stablecoins:
This is a different design from stablecoins because no collateral backs it up. Additionally, it works similar to fiat currencies. it indicates that sovereign country’s Central Bank governs it. Well-known Non-Collaterali Stablecoins:
Are Stablecoins worth it?
If you are unfamiliar with blockchain technology and are unsure what to do when market conditions change, you may need to keep your digital assets in Stablecoins because cryptocurrencies are typically highly volatile. So, I‘ve outlined below some of the advantages and disadvantages:
- Benefits of Crypto-economy are it’s low fees, secure transactions & Anonymity can be partial or complete.
- Asset-backed and stable.
- Adoption Support and easier transition from fiat to cryptocurrency use.
- It involves regulations and fiat-related regulatory processes.
- Can be used for remittances, for payments the same way as euros or dollars and used to pay with visa cards, etc.
- Requires a Third Party and trust from an entity.
- External audits are required to ensure that assets are properly accounted for.
- Traders and investors usually want higher returns and may resort to other means for financial gains.
- Regulations and Fiat-involving processes.