Beginners Guide to Stable Coin!
Read about What is stable coins and what are its types. Pouring some light on understanding the pros and cons of these coins and also gaining some insights into the top performing stable coins in the market.
INTRODUCTION:
We have witnessed hundreds of digital currencies being introduced every day, and with so many options around it puts investors in a dilemma of choosing the most reliable and trustworthy currency.
Each brand focuses on gaining maximum community trust by showcasing its key features and pros of investment. Nevertheless, it raises a question: How can we trust a coin that does not ensure a value back when fluctuations are extreme?
To overcome such fear and eliminate the benefit of the doubt, the concept of STABLE COINS was introduced.
Before moving any further let’s understand what Stable coin is?
WHAT ARE STABLE COINS?
A stable coin is a cryptocurrency token designed to maintain its value steadily without fluctuating. US dollars, gold, or cryptocurrencies typically serve as a reserve asset for stable coins.
Since they are pegged with an asset, they maintain a steady price. By doing this, they have become a major liquidity source in the volatile cryptocurrency market.
Suppose you buy 1 stable coin for $1; you will then be able to sell the stable coin for $1, later.
While unbacked and new emerging currencies intimidate investors, stable coins take a different approach to creating value in the cryptocurrency space, because they are pegged to something of value.
The value of stable coins gives them an edge over other coins in the cryptocurrency ecosystem and gives them a greater chance of lasting longer.
WHAT ARE THE TYPES OF STABLE COINS:
1. Fiat-collateralized stable coins:
The Fiat-collateralized stable coins are issued with respect to a fixed ratio pegged to the total amount of issued tokens must be in 1:1 ratio with the total amount of cash in the vault or bank.
For example, 1 stable coin would be equal to the value of $1. So, for issuing 1 stable coin, $1 will be kept at the bank.
2. Crypto-collateralized stable coins:
In the same way that fiat-collateralized stable coins are backed by fiat currency, crypto-collateralized stable coins are backed by cryptocurrencies. By backing stable coins with other cryptocurrencies instead of USD.
Now, this might raise a question in your mind that if cryptocurrency is backed by cryptocurrency, then what about price volatility? Well, here’s a solution to the catch.
When it comes to backing cryptocurrency with crypto, banks generally prefer Over Collateralization.
Understand it this way;
In general scenario, if you take a bank loan, keep your house as a mortgage. The bank now has a guarantee that even if you are unable to return the loan amount, it will take your property.
However, if you choose to issue stable coins as your loan then you will have to mortgage your other cryptocurrencies that are of higher value.
For instance, if you want to get 5 stable coins issued, you will first have to deposit 50 bitcoins. This way, there is enough room to accommodate price fluctuations. So even if the price of bitcoin falls it will surely recover the value of 05 stable coins.
3. Commodity-backed:
As opposed to fiat or crypto, these stable coins use physical assets like gold and other precious metals as reserves. Gold is the most commonly used commodity. The Tether Gold (XAUT) and Paxos Gold (PAXG) stable coins are two examples of commodity-backed stable coins.
4. Algorithmic Stable coins:
Last but not least among stable coin categories, we have non-collateralized or algorithmic stable coins. Stable coins backed by algorithmic algorithms do not have any assets or collateral.
When algorithmic stable coins do not have any collateral backing them up, how are they classified as stable coins?
A specific algorithm controls the supply of stable coins. This strategy is also referred to as seignories shares. As demand rises, new stable coins will be created to reduce the price to normal levels. When coin trading on the market is relatively low, coins are bought up in order to reduce the supply.
Stable coins based on algorithms can provide stability in accordance with the tenets of the market. Algorithmic blockchains rely on continued growth to ensure success. You should be aware that algorithmic stable coins do not require collateral for liquidity, and you can lose your money if there is a crash.
LIST OF TOP STABLE COINS:
There have been numerous stable coin projects estimated to come into existence ever since the launch of the term back in 2014.
Although we cannot debate or guarantee the best stable coin, we can introduce a few stable coins that have successfully made it to the end.
1. Tether
2. DAI
3. USD Coin
4. Gemini Dollar
5. True USD
6. Paxos Standard Token
PROS & CONS OF STABLE COINS:
PROS:
1. Transactions are processed quickly and cheaply
2. Low volatility in comparison to underlying assets
3. Transferable from and to other digital assets
4. Accessible outside the traditional financial system
5. Functionally similar to traditional fiat currencies
6. The underlying protocol offers real-world flexibility
CONS:
1. To participate, participants must understand blockchain terminology
2. Problems with interoperability and compatibility; different stable coins use different blockchains
3. A stable coin’s value depends on the efficiency of the protocol and the underlying reserve asset
4. The lack of regulation prevents widespread adoption in traditional markets
5. It is possible that regulatory changes will hinder adoption and interfere with existing protocols
CONCLUSION:
Coins with a high degree of stability have the potential to fill in the loopholes in the crypto space and earn trust from the wider community. It is imperative that we prepare for the limitations of stable coins and get it right.
Standing on the same parallel grounds as the idea of John Nash’s ideal money, stable coin has what it takes to become a global money standard. As a result, we have been able to develop a decentralized currency that can promote price stabilization.
CALL TO ACTION:
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