In today’s fast-moving digital world, the smart way in which we do several things has changed productively. We rely on modern technology for all kind of things these days such as for managing the business, staying connected with family members and friends, entertaining ourselves, and even for practical things such as doing the shopping, enhancing our knowledge and more.
Another part in which technology has helped to revamp our lives is through the way we plan certain transactions. Over recent years, technological advancements have allowed us to enjoy the convenience and ease of online payment transactions such as using credit and debit cards to make transactions online and even using payment services such as Paypal to send or receive money. However, more recently cryptocurrency has become an increasingly popular option and one of the best-known ones in the world is Stablecoin.
Over the past 2 years, we have seen the creation of stablecoins: tokens that are pegged to and backed by real-world assets, such as fiat currency, gold, or other types including those where an algorithm regulates the supply of the token based on demand.
There are over 50+ projects in late development or live, with many more on their way, and you may have heard of some of the most prominent of those; the likes of Tether (USDT), USDX, TrueUSD (TrueCoin), Havven, Rockz, MakerDao/DAI & more…
Stability is a critical matter. While experienced investors/traders have accomplished how to fold the volatility and build a profit out of it. Bitcoin, Ethereum, litecoin and most of the Cryptocurrencies have made their way into the lives of many and yet, but they still struggle to accomplish one of the primary purposes of fiat currencies — you cannot able to buy real-world stuff with them.
There are a few exceptions, however, crypto is still a long way away from being a universal medium of exchange.
Just think about this: unless you and your house-owner are strong cryptocurrencies like Bitcoin or Ethereum supporters, you won’t be able to pay your house rent with BTC or ETH because neither of you is sure what it’s gonna be worth future. So it makes causes some issues behind the sense of cryptocurrencies.
With the help of Stablecoin, you can overcome these major issues before that you should know about the Stablecoin and why we need it?
In this blog, we going to explain what is Stablecoins and Why it’s so popular?
What is Stablecoin?
Stablecoins were developed in an attempt to give cryptocurrency the elements that it’s lacking, and make it more valuable and usable. Another step towards mass support for all platforms.
The term stablecoin specify to any crypto coin or token pegged to a real-world asset with an approximately stable price, such as fiat currencies or gold. A stablecoin can be controllable of a central entity, like Tether (USDT), or a Decentralized Autonomous Organization (DAO), like Dai, a stablecoin which is created on the Ethereum network.
“Nubits is one type of familiarized stablecoin which is partly controlled by a DAO, but is also under control by a central authority, representing a hybrid issuance model”
Stablecoin assigns to a new type of cryptocurrencies which offer price stability and/or are backed by reserve asset(s). Currently, stablecoins have acquired enough traction as they strive to offer the best of both world’s – the current processing and security of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
A stablecoin is mostly backed by a reserve asset that has the accurate equal value of the coin/token. The reserve can be fiat currency, gold, or a cryptocurrency. The provider, whether it is a central entity, or under control of a DAO, should only issue a number of stablecoins equal to the reserve they own. New crypto coins or tokens can be issued only when the reserve grows.
What are the types of stablecoins?
There are three types of stablecoins, namely:
How does it work?
Stablecoins attempt to bridge this gap between fiat currencies and cryptocurrencies. There are three types of stablecoins based on their working mechanism.
These are the cryptocurrencies which are pegged to a national currency, like Tether which is pegged 1:1 to the US Dollar. This is the simplest way that a stablecoin can be created. As the name intimates, fiat currency requires to be deposited as collateral for a fiat-collateralized stablecoin to exist. From there, the tokens are issued at the 1:1 ratio against the collateralized fiat currency.
This is an easy method but needs regular auditing and a financial curator to oversee that the token remains fully collateralized – which gives a disadvantage of the token being centralized by a party.
Crypto- backed stablecoins
Crypto-backed stablecoins are backed by other cryptocurrencies. Since the reserve cryptocurrency may also be prone to high volatility, like stablecoins are “over-collateralized” – that is, a higher number of cryptocurrency tokens is handled as a reserve for issuing a lower number of stablecoins.
For example, $4,000 worth of ether may be held as reserves for issuing $2,000 worth of crypto-backed stablecoins which accommodates for up to 50% of swings in reserve currency (ether). More usual audits and monitoring add to price stability. Backed by ethereum, MakerDAO’s DAI is pegged against the U.S. dollar and allows for using a basket of crypto-assets as a reserve.
There are stablecoins which build use of a Seigniorage Shares system. Seigniorage is the difference between the value of money and the cost of printing it. Non-collateralized stablecoins rely on a mechanic algorithm which changes the supply volume as requires to be in order to maintain their price.
Through the use of smart contracts, the stablecoin will sell if the price falls below and pegged currency and will supply more crypto tokens to the market if the value rises above the pegged currency.
Highlights/ Features of stablecoin:
How do stablecoin companies make money?
Some companies or startup’s set up fees for the users who trade their coins. In another way is to use a stablecoin solution as a marketing product and encourage potential clients to use their other services or products. Take, for example, Coinbase and USDC. Business models are quite different and there’s always room to action.
The List of the Most Popular Stablecoins:
Other stablecoins that are backed by crypto include Shelling Coin and TruthCoin. Digix Gold and OneGram are backed by gold. Kowala, Stably, Augmint, Carbon, Nubits, Gemini dollar, Paxos, Nushares and USDC are stablecoins pegged to the USD. GJY is a stablecoin backed by Japanese yen. EURS which is stable crypto backed by EUR
Why it’s so popular?
Still, some of the Stablecoins discussed might seem promising, choosing the winning horse among them can be a little confusing. Governments might have to go to accept Cryptocurrencies, exclusively in that they support the shift towards a cashless environment. However, the high volatility of crypto token and the fact they are non-collateralized currencies are the main reasons that laws remain afraid to accept mass adoption of crypto.
Because governments may ask “How stable is Bitcoin?” we can’t count on them to trust it. Stablecoins might be the answer to governments’ fears, but we have yet to testimony the birth of a Stablecoin that perfectly adheres to the principles of the blockchain technology: decentralization, full transparency, optimum security, and immutability.
With the help of several factors, today Stablecoins are only a good concept, which is still far from boundless use. To a large extent, this direction has good prospects in the future. Financial transactions which will be made via stable Cryptocurrencies will be able to bring the real economy to a collectively new level. With their help, constitutional procedures can be avoided, and due to smart contract technology, it will be possible to do without third parties.
The Bottom Line
The demand for Stablecoins is essentially explained by the fact that they bring stability to the risky crypto market space and make digital assets more trade-able and like fiat currency. A lot of Venture Capital Money went into stablecoin development in 2018 because of the perspectives that their business models can offer. However, skeptics are less than excited, saying that volatility is only a temporary problem of crypto and it will sooner or later be solved anyway, so there won’t be any need for things such as stablecoins. People living in all over the worlds with unstable local fiat currencies could use stablecoins to digitally hold a more stable foreign currency. However, while Stablecoins could be more secure than real currencies in some situations, the values will still fluctuate if people lose confidence in their worth. Anyhow the volatile market, cryptocurrencies like BTC, ETH remain popular with investors and people hoping to become Bitcoin millionaires. While stablecoins might seem a keen alternative, it’s unlikely people will trade their chance to earn millions for security.
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