The crypto industry has gained popularity amongst prominent traders and investors. If there’s a conversation going on between investors, cryptocurrency is surely going to be one of the topics. When talking about the crypto market, there are many types of coins namely, Bitcoin, Altcoin, and stable coins.
Bitcoin, as we know, is the heart of the entire market. Altcoins are all other cryptocurrencies than Bitcoin and the majority of them are the forks of Bitcoin with small uninteresting changes.
However, a stablecoin is a new class of cryptos that attempts to offer price stability and is backed by a reserve asset like INR, EUR, USD. Stablecoins offer many benefits that other crypto coins provide, with one essential difference – they are stable, hence the name.
In a market where the price of assets is highly volatile, the option to ‘store’ funds’ value in a way that excludes volatility is quite essential. This option is not limited to crypto traders only, but also expands retailers to accept cryptos without the need to worry about price fluctuations.
In most cases, most of the stablecoins are pegged to a widely used FIAT currency such as the US Dollar or the Euro or Yen. Some are pegged to commodities, such as gold and silver.
TYPES OF STABLECOINS
Fiat-backed stablecoins are simply crypto tokens whose value is pegged to and backed by reserves of fiat currency like Euros or US Dollars. Tether (USDT) was the first stablecoin to be introduced in the market. It also showed the concept of a fiat-backed digital currency which was pegged to the value of the US dollar and backed by reserves representing the total market capitalization.
These types of coins are issued with respect to a fixed ratio pegged to the fiat currency. Here, the amount of the issued tokens must be in the ratio of 1:1 with the total cash amount in the vault or bank.
For instance, 1 stablecoin would be equal to the value of $1. So, for issuing 1 stablecoin, $1 will be kept at a central custodian such as a bank.
Asset-backed stablecoins are backed by reserves of assets other than fiat or cryptocurrencies. Although this category is still relatively contemporary, it has the potential to expand. It’s not necessary that these tokens are pegged to the price of fiat currency but it can be pegged to the value of their underlying asset.
Petro which was linked to the price of oil is an example of Venezuela’s famous crypto failure Another crypto, Digix is backed by and pegged to the price of gold. Similarly, Paxos, the issuer of the Paxos Standard, also offers a gold-backed token called Paxos Gold.
Asset-backed stablecoins are not much used as a medium of exchange but more as a way of investing or trading in the underlying asset, without actually owning the asset. Furthermore, because asset-backed tokens represent a title of ownership, it might be centralized or have legal or regulatory implications depending on the jurisdiction.
CRYPTO COLLATERALIZED STABLECOIN
The third approach is using cryptocurrency collateral. This is the same as the fiat collateralized stablecoins but rather having reserves of fiat, you need to have a basket of cryptocurrencies as the reserve.
For instance, Ethereum can be kept as collateral to create a cryptocurrency-backed
stable coin. It’s highly transparent. Any user can see the collateralization ratio as the values and history of transactions are stored on the blockchain.
The best example of this type of stable coin is DAI token, an ERC-20 token built on the Ethereum blockchain.
NON-COLLATERALIZED STABLECOIN (algorithmic)
This type of stablecoins is not supported by either real or digital asset collateral, instead it depends on a complex combination of algorithms and smart contracts to keep a stable price are the Non- Collateralized Cons. It is done by buying and selling the stable token and manipulating its supply.
These assets are based on the concept of Seigniorage shares which was first introduced in a paper by Robert Sams in 2014 and were at first lauded for their decentralized and market-driven approach.
WHY DO WE NEED STABLECOINS?
If cryptocurrencies often behave price-wise like little fisherman boats bobbing around on tumultuous seas, then a stablecoin acts like a US battleship, let’s call it the USS Crypto, impervious to the ebbs and flows of blockchain supply and demand and mainly there to maintain peace and order.
Stablecoins have a value that is designed to be stable over any period be it be a global pandemic like coronavirus which has destroyed the world economy. This feature makes stablecoins an ideal haven asset because unlike the rest of cryptocurrencies whose prices fluctuate dramatically, a trader can use stablecoin to reduce the risk of loss.
CROSS-BORDER PAYMENT AND REMITTANCE SOLUTION
MNCs like JP Morgan and Wells Fargo increasingly view stablecoins as a lucrative new solution to settle cross-border payments. Transacting with digital assets like these coins is more efficient, faster, and cheaper than current fiat solutions like SWIFT, which takes days to clear and are comparatively expensive because of intermediary financial institutions.
TRADING PROTECTION TOOL
One of the major features is that these coins offer investors and traders a lifeline when markets become volatile. If anyone is trading digital assets frequently, then it’s advised to keep the portfolio in an exchange or wallet, as you can flip your BTC into an altcoin like Ethereum and back to Bitcoin within as little as a split second if opportunity beckons.
However, stablecoins also help to protect your position if you are certain that the price of Bitcoin or any high-profile crypto asset you own will soon fall.
HISTORY OF STABLECOINS
The first-ever stablecoins came into existence in 2014. Both BitUSD and NuBits were the cryptocurrency collateralized coin instead of fiat assets. Both projects are still in existence today, but only shadows of their former selves.
BitUSD (July 2014)
BitUSD, the world’s first stable coin was released on 21 July 2014. It was issued as a token on the BitShares blockchain. It was the brainchild of Dan Larimer (EOS) and Charles Hoskinson (Cardano) who were the two future leading figures in the cryptocurrency industry. BitUSD was collateralized by crypto and backed by the BitShares core token BTS, locked in a smart contract to act as collateral.
NuBits (September 2014)
NuBits which was released in September 2014 was governed by the controversial Seigniorage system which ultimately caused it to shed 94% of its value. Since its inception, this stablecoin has had two serious crashes, once in 2016 and again in 2018.
Tether (USDT) – November 2014
The introduction of Tether changed the entire picture of stablecoin. Standing on the market rank of three, Tether arrived in 2015 on Bitfinex. Tether has played a pivotal role in the rise of cryptocurrencies though and remains the most well-known stable asset currently in the crypto market.
HOW CAN STABLE COIN BE USED?
Stablecoins can be used in many ways:
- Regular commercial payments between companies in different countries
- Remittances to protect against market volatility while payments are being processed
- Recurring payments such as salaries, wages, and rent or any other activity
- Can be used for long-term loans
- A good option for long term store of value and hedging
- Also, for Trading and wealth management, that includes the likes of arbitrage.
There’s no doubt that stable coins should have a place in the crypto industry. They bridge the gap between the world of fiat and crypto, as well as they provide a storage place for investors and traders to temporarily escape the massive volatility of the crypto markets. Yet one has to be concerned that crypto traders are too reliant on stable coins and that their absence or potentially a crash of these coins could lead to far more damage to the crypto space than any hacking incident or FUD story could ever inflict.
The best way to operate these coins is under a regulatory compliant framework that still allows a large degree of decentralization and censorship resistance.
If you too want to stabilize your cryptocurrency investment, you should visit PCEX Member’s market to start trading in C2USD and USDT market.