Heard people talking about stable coins but not sure what they are? In this blog we will simply define and explain it.
A Simple Explanation Of Stable Coins
Cryptocurrencies are notoriously volatile for many reasons. Stable coins aim to remove much of that volatility by tying their value to a more traditional asset. Most commonly, these assets are the US dollar or gold. The result is a more stable cryptocurrency that has more practical use.
Why Are Stable Coins Important?
Stable coins are important because they act as a bridge between cryptocurrencies and fiat currencies or commodities. This makes them much more attractive and functional for every day usage. A merchant may not want to accept cryptocurrency for a product or service, concerned that the value of that crypto may plummet before it can be on-traded or sold. Hence stable coins are much more attractive for this purpose. The combination of digital and traditional assets has drawn billions of dollars into the crypto ecosystem and made stable coins one of their largest growth sectors. Most stable coins are pegged against the US dollar on a one-to-one ratio.
Types Of Stable Coins
There are three different types of stable coins:
Fiat-collateralized – coins are produced in whatever fiat currency they are tied to e.g. USD. It honors the now obsolete practice of backing a currency with a commodity, similar to how gold was tied to the US dollar until 1973. An amount of fiat currency is held in reserve, equal to the value of stable coins in circulation.
Examples of fiat-collateralized stable coins are:
- USD coin (USDC)
- Tether (USDT)
- Gemini Dollar (GUSD)
- Binance USD (BUSD)
Crypto-collateralized – these coins over-collateralize an existing cryptocurrency to provide stability against bigger fluctuations. Users need to lock their collateral into a smart contract which can be liquidated by the return of the stable coins.
Examples of crypto-collateralized stable coins are:
- MakerDAO (DAI)
- Havven (HAV)
- EOSDT token (EOSDT)
Non-collateralized (or algorithmic) – these are governed by a central authority such as a bank and not backed with any collateral. They are stabilized by using special algorithms and smart contracts that regulate the supply of tokens circulated. They have begun to find use in DeFi protocols but have not been as widely adopted as the other two types of stable coins.
Examples of non-collateralized stable coins are:
- Basis (BAC)
- Carbon (CUSD)
Advantages Of Stable Coins
Stable coins are a great way to dip your toe into the cryptocurrency pool as well as providing greater flexibility for trading in the real world. If you don’t follow daily fluctuations in cryptocurrency prices, you can buy stable coins, confident in the knowledge that you won’t be hit too hard if there is a significant fall in crypto prices. Some of their biggest advantages are:
- allows access to the crypto economy with secure transactions and low fees
- more practical for everyday use
- more stable than cryptocurrencies because they are backed by an asset
- regulated with fiat-related principles
Disadvantages Of Stable Coins
- involve a third party and associated issues such as fees and regulations
- offers lower return on investments
- requires assets to be externally audited
- the regulation with fiat-related principles are an advantage as well as a disadvantage
When Was The First Stable Coin?
Stable coins were first issued in 2014. BitUSD was the pioneer on 21 July of that year, issued on the BitShares blockchain. NuBits followed shortly after and both were crypto-collateralized coins. They are still available today.
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