What Are Stablecoins

What Are Stablecoins?

Many people today are losing vast amounts of money due to large fluctuations in the value of cryptocurrencies. Developers are trying to create innovative solutions that will allow the use of cryptocurrencies but not suffer from their instability. What is a stablecoin? The answer to this question will help you get to know the industry better, understand how you can earn, and not lose big money due to problems.

Stablecoin definition

What are stablecoins? The definition says that stablecoin is a different digital currency tied to tangible things to stabilize value.

The cost of Bitcoin and Ethereum is highly dependent on external factors, so we can often observe a situation where the price can fall and increase by several percent in a short period. For people who hold significant assets in cryptocurrency, such fluctuations in value can lead to big problems.

Many cryptocurrency developers are concerned about this situation, so they are actively working on creating alternative solutions. A stable coin differs because, like fiat currency, it has assets to stabilize its value. On the one hand, such a decision may seem ingenious since the price of a stablecoin usually only gradually rises. But on the other hand, stablecoin is starting to lose some characteristics of cryptocurrencies, for example, decentralization.

For the first time, stablecoins appeared in 2014, but they began to enjoy popularity much longer. The first coins were attached to fiat currencies 1: 1, which did not allow actively earning from mining or trading, but they were ideal for storing assets, performing transactions, and many other operations.

Even though the stable coin has a clear advantage, this type of cryptocurrency is not as popular as Bitcoin and Ethereum. It is mainly due to several disadvantages of such a system.

Like other cryptocurrencies, stablecoins can be purchased on the exchange and then transferred to storage in an e-wallet. The principle of operation for the user is no different.

Main advantages of stablecoins

There are several advantages to using stablecoins. You can distinguish:

  • No fluctuations in price;
  • Ability to use smart contracts;
  • Ability to carry out transactions without intermediaries and commissions;
  • Lack of regulation by the authorities.

Typically, many people say that stablecoin is a cross between regular crypto and fiat currencies. It took the best qualities from both directions, allowing users to use coins for their needs actively.

In general, we can say that you can perform a variety of transactions on the blockchain network, use smart contacts, be confident in the security of commerce, and much more. Usually, stable coins are not very suitable for making money on cryptocurrencies.

Stablecoin collateral types

Stablecoin cryptocurrency was originally developed on a 1: 1 fiat currency basis. It is an excellent decision because the currencies of developed countries have a stable price and are rarely subject to stable inflation. In addition, using fiat currencies, you can easily and quickly create ample storage, and the larger the asset, the more stable the new cryptocurrency will be. But the practice has shown that such a solution requires improvements because it turns out that the government of various countries can influence the value of the cryptocurrency, which contradicts many theses about the creation of digital currencies.

As a result, today, there are several types of goods to which stablecoins can be linked:

  1. Regular fiat currencies. It remains one of the most popular options. Usually, developers use the US dollar or euro, but sometimes you can find stablecoins based on the Turkish lira or Japanese yen.
  2. Precious metals. The value of gold is one of the most stable in the world; it usually rises slowly and rarely falls. As a result, of all precious metals, gold is the most popular. However, gem-based stable coins can be found.
  3. Other cryptocurrencies. Ethereum is quite popular among all traditional cryptocurrencies and is not subject to such changes as bitcoin stable coins. This solution helps to prevent influence from the authorities.
  4. Other investments. You can stabilize the value of stable coins with the help of securities, investing in startups, and much more. This solution is not very popular since it is rather difficult to register the regulation capabilities in such systems.

When creating stable cryptocurrency, the company may choose the right collateral that plays a considerable role. If you think everything is correct, you can make the most reliable cryptocurrency that will not experience sharp drops in value. Also, remember that the more storage you have, the more stable the coin will be.

Several popular stablecoins

The Stablecoin list today includes a vast number of currencies, but only a few of them deserve attention:

  • Tether;
  • USD Coin;
  • Dai;
  • Diem.

The above stablecoins are very popular, so each one deserves your attention.

Tether

It is the first stablecoin that was launched back in 2014. Over the years of its existence, it has grown in popularity and has become the stablecoin with the most prominent capital. It is stabilized by the US dollar at a 1:1 ratio.

The popularity of Tether is because many companies from China and Russia use them for trading with foreign companies, in particular from the United States. It avoids government regulation and the payment of significant fees to the bank.

USD Coin

USD Coin is another cryptocurrency-backed US dollar. It appeared relatively recently but is already very popular. This year, Circle (the consortium through which the cryptocurrency is managed) announced its desire to make USD Coin public. It will lead to this currency being suitable for companies that want to operate openly.

Dai

Dai is a unique stable coin regulated by both the US dollar and the Ether token, which is powered by the Ethereum blockchain. It was created in 2015. The developers have tried to do everything to make a decentralized stable coin.

All transactions in the system are controlled by smart contracts, which ensures perfect security of transactions and prevents fraud at any level. The only problem is that this technology has not yet been fully developed and has many vulnerabilities. In addition, all transactions in smart contracts are irreversible, which can frighten many buyers.

Diem

Diem is the only cryptocurrency yet released to the market, but traders are already actively discussing it on various information platforms. The secret is that the social network Facebook is engaged in its development. Initially, it was planned that the stable coin would be based on several fiat currencies at once. Still, then it turned out that it was challenging to implement such an ambitious project. Hence, the consortium decided to create several cryptocurrencies at once, and each of them would be based on different fiat currencies.

Even though this project has not yet been released, many companies are trying to use the ideas that were put forward by this social system when creating their cryptocurrencies or other blockchain-based projects. Diem is especially interested in China, where they believe that Facebook’s multi-million audience can make this stable coin incredibly successful.

More information on stablecoins can be found at Coindesk.

Disadvantages of stablecoins

Although the stable coin has an undeniable advantage over other cryptocurrencies in no fluctuations in value, this currency has several significant disadvantages.

So, to create a stablecoin, you need to make ample storage in the form of an account with a bank or other organization. As a result, there is a risk of counterparties emerging. Now, this type of cryptocurrency cannot be called entirely decentralized. The use of the bank’s services leads to the fact that it can control various operations and charge a fee for its services.

Another disadvantage of stablecoins is that it is almost impossible to check the ratio of currency value to fiat. So, if a cryptocurrency claims it is created according to a 1:1 system, customers often have to take their word for it. If this is not true, in a situation where all clients come to pick up their assets at once, some users will not receive anything. If the difference is not significant, then it will not bring big problems.

In addition, conventional cryptocurrencies were created to carry out transactions without the possibility of intercepting or blocking. At the same time, some stablecoins can block transactions if the system finds them illegal. Some authorities may use this feature. Of course, such cases are rare, but they happen.

So, if you can think of a stable coin well and design it in such a way as to prevent all of the above problems, then your cryptocurrency will enjoy tremendous success with users.

Conclusion

What are stablecoins? It is a unique type of cryptocurrency that has a kind of capitalization. Therefore it is not subject to strong fluctuations in value. They are not suitable for mining or trading, but they are often used to reserve goods abroad, store assets, perform various transactions, and use smart contracts.

Overall, stablecoins have both clear advantages and several disadvantages. If developers can solve all of the above problems in the next few years, then this cryptocurrency is at risk of gaining immense popularity.

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