Details about stablecoins
Stablecoins are trying to combine the best of cryptocurrencies and fiat money. From the first — decentralization and anonymity, from the second — stability. Consider in detail all the pros and cons of these cryptocurrencies.
A stablecoin is a cryptocurrency pegged (usually, but not always) to a fiat currency at a 1:1 ratio.
Since all cryptocurrencies today are characterized by high volatility, according to the idea of the creators, a stablecoin pegged to a stable fiat currency should itself be stable, unlike other cryptocoins.
The popularity of stablecoins has also been on the rise lately. The market capitalization of the most popular stablecoin Tether by April 2022 exceeded $82 billion.
What is a stablecoin for?
In fact, a stablecoin can be pegged to any asset, not just fiat money. It can be gold, silver, oil, and even the value of some securities. Therefore, the number of stablecoins is only increasing. So, there is a stablecoin CACHE gold tied to the value of gold.
Stablecoins are convenient if the cryptocurrency needs to be transferred from one exchange to another, for use in DeFi services, as well as for the so-called “yield farming” – placement of cryptocurrency on DeFi platforms for lending.
Stablecoins also fell in love with large companies. For example, Visa allows crypto transactions through the USD Coin stablecoin.
How do stablecoins work?
The main difference in how stablecoins work is how their value is maintained. Some stablecoins, such as Tether, use a custodian for this, which regulates the operation of the virtual currency and holds the necessary reserve of collateral.
That is, if a stablecoin is backed by, say, dollars, then those dollars are stored in a real bank account. This is how Binance USD, owned by the Binance crypto exchange, works. The collateral in this case is held in Paxos bank accounts.
Other stablecoins can use smart contracts for this purpose.
Types of stablecoins
There are three types of stablecoins: backed by fiat money, cryptocurrency, and not backed by anything, or algorithmic stablecoins.
Fiat stablecoins are the most popular option, the value of which can be backed by fiat currency, gold, silver, and so on.
These stablecoins include Tether, USD Coin, TrueUSD, PAX Circle, BUSD and others.
Cryptocurrency stablecoins are backed by another cryptocurrency, and their value can be pegged, for example, to the dollar. Since the cryptocurrency is volatile, a larger amount of cryptocurrency is used to issue a smaller number of such stablecoins. Let’s say that $2,000 worth of Ethereum tokens become a reserve for issuing stablecoins equivalent to $1,000.
Thus, the stablecoin, up to a certain level, is insured against the volatility of the ether.
Cryptocurrency stablecoins include MakerDAO (DAI), Havven, and others.
Algorithmic stablecoins are not backed by any assets, but rely on an algorithm to maintain exchange rate stability (this mechanism is somewhat similar to the work of a central bank to support a currency).
For example, depending on the market situation, the algorithm can increase or decrease the emission of a stablecoin.
Examples are, for example, DefiDollar and Ampleforth.
Pros and cons of stablecoins
Pros of stablecoins
1. As with other cryptocurrencies, stablecoin transactions are anonymous and secure;
2. In the case of fiat stablecoins, you also get a stable cryptocurrency without sharp price fluctuations.»
Cons of stablecoins
1. You won’t earn on the course increase in the case of stablecoins;
2. Proponents of decentralization will not be happy with the fact that a third party provides the work of a stablecoin; — i.e. in fact, the tokens are printed by a certain company that promises that it will be equal to 1 dollar
3. When investing in a stablecoin, you must be sure that its value is indeed backed by something. Even the most popular Tether could not prove that 100% of the coins are backed by cash.
Terra is a blockchain based on a set of decentralized stablecoins. The most popular stablecoin is called TerraUSD, or UST.
From May 8 to May 11, 2022, the Terra (LUNA) cryptocurrency lost 86% of its value in a day, and the stablecoin of the UST platform also collapsed. The cost of UST dropped to $0.29, and LUNA quotes fell to record lows of $4.5, while in April 2022 the altcoin cost $119.5.
Terra USD price is $0.02237 USD today, but it can go up or down, and your investment could be lost, as cryptocurrencies are high-risk assets and no one is immune from risks.
Stablecoins are an integral part of the cryptocurrency economy, providing a safe and secure medium of exchange for traders and investors. Moreover, stablecoins serve as the main component of strengthening the cryptocurrency economy. However, no one is immune from risks, and cryptocurrencies, even stablecoins, are a high-risk asset.