All You Need To Know About Stablecoins

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Stablecoin is a type of digital coin whose worth or value is attached to an asset like gold or the U.S. Dollar to maintain the price. It can be defined as a cryptocurrency whose value is associated with other assets like fiat currencies and gold.

Cryptocurrencies like Bitcoin and ether are of great worth, and these digital currencies allow several users to send online payments around the globe. Moreover, these assets are of great value that is why traders choose them for trading purposes. But because of their volatility, people usually fear to go for them as a crypto asset.

Digital coins like Bitcoin are unpredictable with their value. Predictions made by trading platforms and experts may go wrong, which may cost you huge losses. On the other hand, when the discussion is about fiat currencies, they usually change their value over time.

Unlike fiat currencies, digital coins change their worth day by day. Yet, it is complicated for traders to go for them. Apart from currencies, if we talk about assets like gold, then its value also changes gradually. There is never an immediate spike or fall in currency and gold markets. On the contrary, there is a regular pattern of growth and decline of certain crypto assets in the crypto market.

A Brief Introduction to Stablecoins

Stablecoins are those digital assets whose rate is associated with real-world assets. One example of real-world assets is fiat currencies, which the government issues and such currencies are used in day-to-day affairs.

The name stablecoin refers to the term ‘stable’ as it is linked with external, real-world, and stable assets like gold and currencies. The value of stablecoin is not at all related to the fluctuations in the crypto market.

Normally, the reality following a stablecoin will set up a “reserve” where there is secure storage of assets that are supporting the stablecoin.

This is one way of tying digital stablecoins to assets. When stablecoin holders are hoping to cash out their units, an equivalent amount of whatever asset supports is taken from the deposit.

One more stable coin is there that is of complex type, and it is collateralized by crypt assets rather than the normal fiat currencies. But they still are directed to follow a mainstream currency like the dollar.

The third type of stablecoin protocol is complex to get right. It has been tried multiple times, but users have failed to get it right. This stablecoin is called algorithmic stablecoin. This type of stablecoin is not collateralized at all; rather, the stablecoins are either burned or produced to keep their worth in line with the price of the target.

Several Types Stablecoin Collateral

  • Fiat

Fiat is the most basic collateral for stablecoins, and if we talk about the U.S. dollar, it is the most prevalent fiat currencies. But firms are searching for stablecoins pegged to other currencies as well.

  • Precious Metals

There are some cryptocurrencies whose worth is tied to the value of assets like precious metals like gold and silver.

  • Cryptocurrencies

Stablescoins even uses other cryptocurrencies such as ether as collateral.

  • Investments

Stablecoins also utilizes other investments as collateral.

Popular Stablecoins

To learn more about stablecoins, let’s go through some of the prominent stablecoins.

Diem

Diem is a stablecoin coin formulated by one of the biggest multinational company Facebook. It was formerly known as Libra. The creation of this stablecoin was taken as a threat and a competition.

In reaction to its making, china has now started working to explore its own crypto-like digital coins. It is because Facebook has a large consumer base, and the users may get into Diem without any competitive stablecoin.

At first, the Diem association had decided that Diem as a stablecoin will be backed by a basket of currencies, including the euro and U.S. dollar. But due to the global regulative matters, the association has changed its vision. They are now focusing on inventing multiple stablecoins. And these stablecoins would be backed by a separate national fiat currency.

Tether

Tehther came into existence in 2014. It is one of the most prominent and oldest stablecoins, and it is also considered one of the most valuable crypt assets in the overall market.

The main purpose of using Tether is to send capital between the exchanges. But it has been used differently, too. For example, Chinese merchants posted in Russia have also adopted Tether to transfer millions of dollars’ worth of value over the border, avoiding stern capital controls in China.

Tether’s blockchain has adopted and implemented world-class security standards. The stablecoin keeps the highest level of transparency and security. Tether as a currency supports converting cash into a digital coin. Multiple fiat currencies like U.S. dollars, Euros, and the Chinese Yuan can be converted into Tether.

USD Coin

USD coin was launched in 2018. This stablecoin is jointly managed by cryptocurrency firms like Coinbase and Circle by the Centre Consortium.

As a stablecoin, the USD coin remains stable to 1.00$ if you are a USD account holder.

Ethereum powers USD coin, and you can store it in an Ethereum compatible wallet like Coinbase wallet. The USD Coin is made to support safe transactions of dollars from your crypto wallet to other businesses, exchanges, and people.

Alike Tether, before its turn towards a mix of corresponding assets, USD Coin is secured to the U.S. dollars with a current supply of around $26 billion. Circle declared in a recent investor display that by 2023 it expects the supply to reach $190 billion.

Dai

Dai is a stablecoin that was created in 2015 and is on the Ethereum blockchain. It is pegged to backed by ether, the token following Etheruem and pegged to the U.S. dollar.

MakerDAO aims for dai to be a decentralized cryptocurrency. It does not want Dai to be operated or controlled by a central authority or any government. It is unlikely for stablecoins not to be controlled by central authorities because national currencies back them.

To learn about decentralized currencies, you should know that these currencies are those which are not at all run by government authorities.

In contrast, fiat currencies are national currencies run by central authorities and the government itself. Unlike fiat currencies, decentralized currencies are not in control of a single central authority. Decentralized currencies also do not support the involvement of third parties, i.e., banks, in their transaction processes.

Dai (DAI) is basically a stablecoin based on Ethereum (ETH) that aims to keep its value constant at $1.00 USD. DAI is not supported by U.S. dollars in a bank account, unlike controlled stablecoins. Instead, it’s secured by Maker platform collateral.

Advantages of Stablecoins

If you are new and are not aware of blockchain technology, it is highly recommended that you go for stablecoins. It is because the mainstream crypto world is pretty volatile. If you cannot make decisions rightly by keeping a sharp eye on market conditions, you should probably go stablecoins.  The crypto market’s volatility may impact your capital negatively if your decisions do not go correct. It is better to select stablecoins instead of other cryptocurrencies to be on the safe side.

In the crypto market, the ‘bearish’ period comes where the price of all the digital coins drops drastically. At such times, you can depend on stablecoins by converting your digital assets into stablecoins whenever the price falls.

Stablecoins provide users with a safe and secure transaction of money, and they keep anonymity to the greatest extent and also have a low transaction fee.

Most of the stablecoins are backed by multiple assets. Many of them are associated with either fiat currency like U.S. dollars or assets like gold, and this makes it more trustable. It is because individuals know that the government controls fiat currencies.

These currencies also adhere to all the laws, rules, and regulations. Unlike other crypto assets, stablecoins are much more stable. The stability comes from the stables assets which back these coins. The price of fiat currencies and assets like gold or silver does not show a rise rapidly. In the case of crypto assets, the price changes on a daily basis.

Disadvantages of Stablecoins

It is safe to choose stablecoins over other crypto assets, but they have some drawbacks that can stop you from choosing them. First of all, if you have been in the trading business for quite a long time, you are habitual of the ups and downs in the market. Such traders keep a sharp eye on graphs, news, and insights into the market. These traders profit themselves by making some right decisions.

Traders with vast trading experience do not prefer stablecoins over crypto assets. The traders usually risk their capital to gain profit from the volatile crypto market rather than playing safe.

Apart from traders not preferring stablecoins, there are other drawbacks of stablecoins too, which may stop you from choosing them. If we talk about stablecoins, they require a third party’s involvement, and individuals require trust from an entity.

Trusting any third party in your money-making process is yet a complicated decision. Trust issues start from the entity having the collaterals it is claiming to have. In some worst-case scenarios, it is possible that the reserves backing a stablecoin could set out to be deficient to cover each unit, possibly shaking faith in the coin.

We all learned that one of the visions of creating cryptocurrencies was to replace the intermediary companies or banks which are associated with the user’s capital. These companies have control over the users’ transactions and can stop them whenever they want to. Some stablecoins too have control over users’ money and may stop the transactions when they want.

USD coin is a clear example of such stablecoins that can stop transactions whenever needed. It openly claims to stop the payments if the coins are utilized in an unauthorized manner. Circle, one of the companies behind USDC, verified in July 2020 that it stopped $100,000 of the stablecoin at the direction of law enforcement.

It is surely a drawback because if we talk about other crypto assets, then they are not controlled by a central authority. The transaction of other cryptocurrencies does not acquire the involvement of any third party. Also, it does not adhere to any rules and regulations formed by the government. Individuals are the masters of their crypto assets, and no other authority has the right to stop their transactions or payments.

One of the drawbacks of selecting stablecoins is that their return is less on the investments made by the investors. Investors and traders usually go for coins or assets that gain profit them significantly on their investment. Stable coins fail to satisfy those traders who are expecting higher returns on their expenses.

Conclusion

The discussion for stablecoins started from learning what they actually are. We discussed that stablecoins are cryptocurrencies that are linked with stables assets like gold and fiat currencies. It was explained that stablecoins are used to make secure transactions around the globe.

After that, it was discussed how other cryptocurrencies like Bitcoin are used and accepted worldwide. Also, we learned that digital coins like Bitcoin have great worth, and it profits their investors significantly. Then, we discussed the period in which fiat currencies and digital currencies show a shift or change in their worth or value. It was learned that the fiat currencies show a gradual change in their value over time. On the other side, we examined that the crypto assets do show a change in their value on a daily basis.

After this, we studied the multiple collaterals of stablecoins. At first, we discussed that fiat currencies are one of the most common collaterals of stablecoins. Fiat currencies like U.S. dollars and Euros are usually used for purposes in which real-world currencies are converted into stablecoins. Also, these stablecoins remain of the same worth as the collaterals. We also learned that precious metals like gold and silver are also utilized as collaterals for stablecoins. Even other cryptocurrencies can be converted into stablecoins, and that is the most amazing factor. Stablecoins also considers cryptocurrencies as collateral.

Later in the following article, multiple types of stablecoins were studied. At first, we studied Diem, which was conceptualized by Facebook, a multinational company that does not need any introduction. The existence of Diem proved to be a threat to the superpower China.

China started working on its own crypto-like digital currencies only after Diem’s creation.  Then, we discussed Tether, which is the most widely accepted, and that it is one of the oldest stablecoin. It was examined that how Tether accepts currencies like USD, Euros, and Chinese Yuan to be converted into stablecoin.

After Tether, the USD coin was discussed. It was studied that the value of the USD coin remains stable with the price of the U.S. dollar. One of its advantages was that the wallets compatible with Ethereum could also be used for USD coin because Etheruem powers it. Ethereum itself is a digital currency with great worth and is accepted around the globe.

After the USD coin, DAI was studied. It was known that Dai is also pegged to the U.S. dollar as a stable fiat currency. MakersDao’s vision for making it a decentralized currency was also explained.

After discussing various kinds of stablecoins, the discussion moved towards the advantages of stablecoins. It was understood that in the ‘bearish’ period of cryptocurrencies, stablecoins are the best options to go for. It is a good idea to convert your other crypto assets to stablecoins, so you do not lose.  We also examined how these stablecoins allow safe and anonymous transactions of money because of numerous laws.

Then our discussion took a turn and moved towards the disadvantages of stablecoin. We studied that in stablecoin, the involvement of a third party is a must, and there are multiple trust issues associated with any involvement of a third party.

Also, some stablecoins have control over your money and transactions. It is possible that the stablecoin you have chosen might stop your transactions for many reasons. The main motive of creating cryptocurrencies was to minimize third parties’ use in money transaction processes. The stablecoins are connected with fiat currencies which are again controlled by central authority and government. It means that stablecoins have to adhere to all the laws and regulations, and this actually restricts the user.

Moreover, stablecoins returns on investments are low. The traders who trade cryptocurrencies take risks, but they profit immensely by making the right decisions. Unlike other cryptocurrencies, stablecoins do not return huge profits, and that is why investors do not prefer such coins, especially for trading purposes.

This article covers each and every aspect of stablecoin. After reading this article, you may have learned nearly everything about stablecoins in easy words, and it is up to you whether you go for them or not. It was all about stablecoins. They have multiple disadvantages and several advantages that may attract you to choose them for your online transactions and trading purposes.


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