Stablecoins - The Quiet River of Crypto!
By Crypto Nation – 27 June 2020
Stablecoins have become essentialfor traders. These cryptocurrencies are special because they are stable, being based on the value of another asset.
Stablecoins: What is it? How is this useful?
What is a Stablecoin?
Stablecoins are cryptocurrencies with a stable price, because they are backed by the value of another asset.
Most Stablecoins follow the dollar rate. Others may be backed by the yen, or the euro.
Some more exotic are based on commodities for example, such as the price of gold .
Stablecoins were created in order to solve several problems encountered in the cryptocurrency world:
- Reduce exchange (conversion) fees: Thanks to Stablecoins, you no longer need to convert your crypto into Fiat (dollar, euro, etc.) to find a stable price. We can stay in the pattern of a crypto to crypto transaction, which often results in lower costs.
- Reduce volatility: Given the stability of the prices of Stablecoins, they allow traders, for example, to protect themselves from large movements in the market. While keeping cryptocurrency.
- Avoid taxation: Transactions to Stablecoins therefore remain from crypto to crypto. Since there is no conversion to a fiat currency (Fiat), this makes it possible to avoid taxes in certain countries.
Stablecoins are increasing in demand. On Tether alone (Biggest Stablecoin), there are more than 10 billion dollars traded daily.
How do Stablecoin work?
There are several methods to try to stabilize the value of a Stablecoin, so that its value remains constant over time. The choice of method will depend greatly on the will behind each project, and its vision in terms of decentralization.
The majority of Stablecoins are therefore backed by a fiat currency (Fiat), such as the dollar or the euro. If we take the example of the Tether Stablecoin, backed by the dollar: for each Tether issued, the issuer says it holds a corresponding $1 in a bank account. This ensures that the company is able to exchange the corresponding classic currency for Stablecoin, and vice versa.
In the case of a Stablecoin backed by a commodity, such as gold or oil, the principle is similar. Each issued token is supposed to be backed by a corresponding real given unit. Example with a Stablecoin based on the price of gold, the VeraOne: You hold a VeraOne token (VRO), then this is equal to 1 gram of physical gold.
There are also Stablecoins backed by other cryptocurrencies. You will probably figure it out, the aspect of the stable price of Stablecoin is here much more complicated. In a majority of cases, the projects concerned use a technique of over-sizing of reserves. With this mechanism, for each Stablecoin issued, the collateral provided must exceed the equivalent value in cryptocurrency, which can sometimes go up to double. The purpose of this process is that the crypto reserve will be able to absorb market fluctuations.
The latest types are collateral-free Stablecoins. Much less popular, these Stablecoins are managed by a smart contract that regulates the production of money to ensure the stability of the value of the Stablecoin.
Examples of Stablecoins
The leader in Stablecoin, Tether (USDT), currently ranks 3rd in terms of market size for all cryptocurrencies, behind Bitcoin and Ethereum. We therefore immediately understand the enthusiasm for this type of asset.
Stablecoins USD Coin, TrueUSD and Paxos Standard are also focused on the price of the dollar $, like Tether.
The Dai, also backed by the dollar, adds a layer of decentralization.
The Binance USD, is a Stablecoins issued by the platform Binance focused on the $ dollar.
PAX Gold, Tether Gold and VeraOne are backed by the price of gold.
There are plenty of others, but we have selected the main ones here.
The usefulness of Stablecoin
In addition to their advantages seen in the first part, it is possible to use Stablecoins to save easily with rates much higher than those charged by banks.
Several platforms allow you to save dollar-backed Stablecoins (such as Tether, USD Coin, TrueUSD, etc.) for 12% annual interest!
You will learn more about them in the following guides: