What is stablecoin?, types and the benefits of stablecoin

 

 

Blockchain brought to us new technology improve on our lives and investments. Its a wonderful gift from innovators to users and high profile investors with its digital assets- Cryptocurrencies.

For a long time Cryptocurrencies have been struggling and aiming to be at the top hierarchy in the world of investment .

However, despite its beneficial features and all attempts, in a world case scenario it is still yet to fully get there.
For the fact that cryptocurrencies are extremely volatile, and the prices never stabilize or not always stable.

For this reason, many users are not sure of their confidence in crypto, investors are not ready to adopt it, so they move away fro cryptocurrency. Experts believes that it still has a long way ahead before the currency can be adopted globally.

But the situation is quite different now as things turned out differently , hitting their all time best $800 billion in 2018. Later the situation changed to $200 billion but now there has been an upward movement in price in 2019.

Stablecoin.

The stable coin is the talk of the town, and from indications, though popular but most people are yet understand what it is and its operation. This guide will help in a better understanding of stablecoins.

What Is A Stablecoin?

Stablecoin is a type of cryptocurrency that always holds a stable price , just as the name implies. To stabilise the unstable crypto market situation and to ensure a stable ground for all. These type of cryptocurrencies was created to do this purpose.

They are cryptocurrencies created to minimize the volatility of the price of the coin, which is relative to some “stable” asset or basket of assets. It can be pegged to any currency such as dollars and it can also be exchanged for a traded commodity , example Gold or industrial metals.

Some Stablecoins backed by currencies or commodities directly which are said to be centralized, and those leveraging other cryptocurrencies are referred to as being decentralized. Read on as we will elaborate on that fully.

Stable Coin cryptocurrency is important for crypto investors, for exchanges and the overall crypto market. Lets look at this scenario for instance. Tether is a stablecoin backed by fiat money – dollar ,and it can be traded for $1 only .Now u can see the role tether stablecoin has played in in the stability of cryptocurrencies.

There are many stablecoins coming up on the exchange this days. These coins are gradually gaining a lot of grounds and building more confidence towards digital currencies and and the way people sees it.

Some people might think, why so many projects on stablecoins when all gives out same output or result. The answer is , no one stablecoin has same mechanism. Every single stablecoin has its own set of mechanisms, different mode of operation- protocols and as such utilizes different methods to achieve stability value.

Most of the stablecoins hold up some form of collateral and then manage their supply to influence the marketplace and make it stable then in case of Money backed stable token , it holds actual money in reserve and then ensures a redeemable currency in exchange for the tokens.

Its utmost importance for every coin to “holds its stable value” in any case even though the algorithms behind each of the coins might look somehow complicated.

Why Stablecoin Exist?

The restrictions and regulations involved with fiat money make dealings or circulating with fiat money a difficult task in the crypto world.
This is many of this cryptocurrencies dont deal with dollars. Thus making it hard for investors to invest in cryptocurrency with hard cash. Stablecoin comes in as a solid substitute for dollars and it can also help out in other cryptocurrency investments.

The stablecoins works like to mimic the nature of dollars and using that way to sell bitcoins and get cash.
There is no liquidity in Crypto marketplace . Stable coins list, on the other hand, is designed to provide the liquidity that the crypto marketplace needs. This is they reason that makes stablecoin essential for the overall digital currency growth and worldwide involvement and also the currency stable value.

Different Types of Stablecoins

All the stablecoin cryptocurrency might has the same type of algorithms while some are different. However, that’s not the main issue here. There are different types of stable coins list in the market with different mechanisms.
These are typically categorized into four different coins.

1. Fiat-Backed Stablecoin

Thess type of stable coin are backed up by fiat money . It is of the common forms of stable coin cryptocurrency. In a simple term, one may refer it as a digital form of fiat money.

Fiat money is a money authorised, adopted and used by that country. It is the existing currency we have for each country. it’s simply just the paper money you use every day to buy things and deposit in your banks. For example, USD, CHF, EUR, JPY, and GBP, Naira etc

 

This form the basic element of stablecoin as the coin has same value with the regular currency. In this case if your currency is $1 then each stable coin cryptocurrency will have same value of $1. The ratio will always be 1: 1 or any same ratio as the case may be.

However, even though method makes it have same value with the currency but at the long run, all these types of stablecoins will have real money backing them up from the banks.

This model makes the overall concept of decentralization somewhat invalid because as a mater of fact , the cryptocurrencies will be ultimately controlled by the banks resulting to centralised system defeating the main purpose of blockchain technology.
Though this type of stable coin structure is also quite simple but you still have the issue of trust.

The Process

 

This type of stable token is quite simple to process. A third party is involved, the company will over see the flow of the fiat money and the tokens. The company will accept new fiat money and then issue the exact amount of stablecoin on the network.

They will as well be in custody of all the fiat money that the token is being represented
But there should be trust to the third party involved and have the believe that banks have equivalent of same amount with them. It all centres on trust which brings us back to the issue again.

Having issued the tokens and you buy stablecoin with fiat money you can also use it on various platforms. If you want to sell your tokens and get the cash back, the company would transfer the money to you. Afterwards, they tokens you redeemed will be destroyed. By so doing , they same ratio of 1: 1 will be maintained even if people buy some tokens or destroys them. This is another way stablecoins works to keep a stable value

Any Advantages?

1. Fairly Stable: Fiat currencies are quite stable because of government support. Also, you will be able to have legal rights as this stablecoin deals with legal terms.

2. So Simple: You will be able to understand The mechanisms quite easy to understand. Straightforward algorithm, no complexity.

Disadvantages

1. Centralized System: The structure of this stable coin is quite centralized, and you know how vulnerable it can be. It negates the original purpose of Blockchain. It does not operate in a decentralised system

2.Trust Issues: There is this problem of trust , no alternative than to trust them blindly despite the existence of external auditors required to validate all accounts. Still contrary the purpose of and nature of cryptocurrency.

3. Rules: As you deal with fiat money passively, you would be obliged with rules and regulations. This rules makes it difficult

Commodity-Backed Stablecoin

This type of coins is backed up commodities such as Gas, Gold, Valuable Metals, etc. With stablecoin all these commodities will always have a stable value on the network. You can place products in fungible assets as you can trade them for hard cash on the same market.

Some commodities can be stored for rainy days. The most common amongst them is gold, a precious metal with a very good value in the market. Gold is a rare metal and people have been using it as an accessory for generations. The regular demand for this precious metal makes it a tradable commodity. Others are good too but gold is higher in demand which can be stored up by investors for business.

Stablecoin that is backed up by gold usually have a specific value assigned to each of the coins. For example, one gold stablecoin could represent one gram of gold. Though , you might wonder where is the physical gold itself. These golds are kept in a highly secured trusted vault, which in most cases, are the third party.

Commodity-backed stable coin crypto isn’t as popular as fiat-backed stablecoin But the good thing here is that you can get an alternative option if you don’t want to invest in fiat currencies. It’s kind of like a tangible option for you.

The Process

The process is not as simple as fiat-backed stable coins list. A user buys gold or another form of the commodity through the platform. After wards, the seller will provide the gold that the user just bought and the custodian which is the bank, will preserve this in a safe vault.
Once, the gold is stored, everything they did is placed on any form of a digital card. This card is necessary because in case of any mismanagement any of the parties involved can lay claim to their possessions based on the information as contained in the card.

This digital card gets is then sent to a smart contract on the network, and that contract then mints new gold stablecoin or token on the net. The users then get the tokens they claimed for from the beginning This is more of a complicated way on how stablecoins work.

Although there isn’t that much stable coins list, backed up by commodities nowadays. On the other hand, the few projects are giving users a bit more option other than fiat-backed ones, so that’s a good plus .
Becareful as u invest , as there have been reports about scam commodity-backed stable coins list projects, so make sure they are authentic or real ones before investing.

Any Advantages?

1.Real Asset: Any investor here can hold real

assets as a digital form.its redeemable any time as the assets are tangible. The investor wants using the conversion rate and own the asset itself. As you can see the assets are tangible. So, you can redeem them at any time using the conversion rate and own the asset itself.

 

2.Higher Stability: The value of commodity backed stable coin don’t really fluctuate that much like the fiat ones. So, you can refer them as a stable source of investing. Afterwards the will come in handy

 

3.Offers Liquidity: A unique approach to tokenize commodities is that it makes the blockchain platform more liquid than before. It will facilitate a greater span of price discovery too.

The Disadvantages?

1. Too Many Authorities: This type of stable coin requires a lot of extra authorities , middle men who interferes with the whole process of the transactions such as the vendors, custodians, and other authorities. This one is kind of a centralized system rather than a decentralized one, which increases the risk of failure with it cost

2. Requires Audit: To reduce risk and increase trust on the users and to be sure that everything is on point will require audit sessions. This consumes a lot of time and undermines the overall blockchain experience. Time factor is very important.

3. Cryptocurrency-Backed Stablecoin

Cryptocurrencies is the backbone of this coin. It backs up this type of stable token. Popular cryptocurrencies such as Ethereum or Bitcoin, which has a lot of market value are used here. Usually, it is backed with different cryptocurrencies not single coin. Volatility risks is prevented by this model.

You can  not use a single crypto to back up this stablecoin price, if it happens then the primary goal of stablecoin becomes void. It would just be a coin backed up by another coin, which makes this really unnecessary.

However, one stands for the other in times of crises, that is to say that if this stablecoin price is backed up a mixture of cryptocurrencies then even if one of the cryptocurrency has a high price fall, other currencies can back up that fall. This system works this way to ensure a stable value for the tokens.

Cryptocurrencies are greatly volatile assets, so investing in only single one is very risky

Another great factor of cryptocurrency-backed stablecoins is that it is very much collateralized. This type of structure is necessary for the maintainance of value fluctuations of the crypto market in case of sudden price crash.

The Process

In this one, the user will lock their base cryptocurrencies and then based on the fact that the stablecoin will get created. After the creation, all of them would be sent to the users’ wallet. In this pattern, users usually get a loan from the smart contract.

They collateral will be locked and will be used that to pay off any kind of debt when the value of stablecoin price decreases somehow. The user would set a withdrawer level and if or when a sudden crash happens and it comes close to that level, the collateral will automatically liquidate.

Other methods, such as supplementary or incentives further ensure the steadiness of price of the stablecoin. So, all doesn’t solely really depend on the group of cryptocurrencies but as wel as the combination of all.

Are There Any Advantages?
1. Decentralized System: Unlike other stablecoins as well, this one has a more decentralized model amongst all. if you are prefer more decentralized a
Process, then you can embrace this.

2. Higher Efficiency: One can quickly and easily transform any kind of crypto to another crypto on the network. Liquidation process is very easy here.

3.Transparency: All transactions are recorded on the ledger system, so easy to see everything that is happening.
 Creates Leverage: As the coins are over-collateralized, any user can use it as a means of trading, which ensures more efficient process.

The Disadvantages?

1. Unstable: As these types of stablecoins are backed by cryptocurrencies itself, so its unstable common and would be more volatile than other types of stable coin.

2. Too Complex: The minting process is a bit complex , so cumbersome and depends on so many factors. If one of them is missing during the process then the whole process would collapse.

3. Instant Liquefying: It can both be a good one and same time so bad in that you can liquidify your assets if it falls below the threshold value. But in doing so, the price range could drastically fkuctuate, making the whole system volatile.

4. Seignorage-Style/Non-collateralized Stablecoin

This category of coins is a bit different. They don’t have any assets backup instead they use an algorithm to burn or add crypto to stabilize the value.

This coin uses a governed approach which ensures the expanding or limiting of coins on the network. In this system the tokens always have a stable value.

As soon as the demand increases, new coins get minted, and it stabilizes the price increase. However, the primary target remains the same always, to make the value as close to $1. Unfortunately, the popularity of this type of stablecoin didn’t go as high as the others.

However the situation is changing as this type can change the prospects of the stablecoin price.

The Process

It’s as simple very simple too. In this case, the user on the network demands for stable coin and the system will generate coins to sustain the demands and stops the price hike as well. But then what if the prices drop because of too many coins?

In that case, the network will offer shares and to buy stocks the person will need the stablecoin. Through this method they get rid of excess stablecoins by selling stocks with stablecoin and this will help maintain and regulate ththe system. Banks uses this strategy too.

 

Advantages

1.Fully Decentralized: No third parties involved as everything gets monitored by the algorithms, the network is fully decentralized without any third party interference.

2.No Backup Assets: This stable token doesn’t have any kind of collaterals backing it up. So, you would never have to fear about price fluctuations of the collateral affecting the whole system.

3. Really Stable: This is comparatively more stable than other types of stablecoins. The algorithms controls any shortcomings in the network and will always make sure that there is never too many or too few coins on the network by regulating it.

Disadvantages

1.Complex Process: Even though the algorithms take care of everything, the process is highly sophisticated. Making sure that the minting and destroying coin ratio always balances each other, is really more difficult than the others.

However, at first glance, they do look a lot more promising and they could really change the usual scenario of the crypto world.

Log on to Blockchainafrica.io for our future posts  on stablecoin: most popular projects and all that you need to know.

 

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Credits: Wikipedia, Techeconomy, Bockchain 101.

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