How to save money while prices are dropping is a query that occurs in everyone's mind. The solution is easy, and nearly everyone has heard of it: “Stablecoins.”
Stablecoins
Stablecoins are a form of cryptocurrency whose value is guaranteed by the value of another asset.
Fiat currency, other cryptocurrencies, or precious metals would be the pegged asset (Gold, Silver). The simplest of the three is fiat money, which means that one stablecoin unit equals one dollar.
Stablecoins were created to combat the cryptocurrency market's instability. Stablecoin is a centralized cryptocurrency with a fixed price of $1. (in case the coin is backed by USD). In certain cases, stablecoins are collateralized, which ensures that the amount of circulating coins is equal to the asset reserved.
For instance, if there are 100,000 coins in circulation, the stablecoin issuer company must keep $100,000 in bank reserve.
The cryptocurrency market now has a plethora of stablecoins. Just a handful of them were able to make a name for themselves. Tether (USDT) and trueUSD (TUSD) are two of the most well-known stablecoins.
How it works
Stablecoins' main purpose is to keep their price constant over time. There are many ways to do this.
Stablecoins are backed by fiat currencies, precious metals, or other digital assets.
The cheapest and simplest way to ensure a steady price is to use fiat currencies to back the stablecoin. A central custodian, such as a bank, must reserve $1 for each stablecoin issued by the company. If the fiat reserve is less than the cryptocurrency circulation, the stablecoin's price can plummet. The fiat currency reserve and circulation supply should be maintained by the stablecoin issuer company. Many stablecoins on the market have been unable to sustain a 1:1 ratio, and their ventures have failed.
Precious metals (gold, silver) are the second way to support stablecoins, but this is not a sufficient way to back cryptocurrencies. Since the price of gold and silver fluctuates every day (even if it is just a minor change), it would be difficult to sustain the stablecoin's price. Another issue is how much metal is stored at the custodians and at what calculation.
Another cryptocurrency can be used to support stablecoins. The cryptocurrency market is never secure, and there is still a lot of uncertainty. The stablecoin's price will be sustained by exchanging $2 in cryptocurrency for each $1 in stablecoin. However, under some circumstances, the process will fail.
Smart contracts may be used to keep the stablecoin's price stable. The stablecoin's demand and supply are monitored by a smart contract, which will buy coins when the price is too low and issue new coins when the price is too high, thus maintaining the stablecoin's price.
Any strategy will be used, but the main goal will be to keep the price stable.
Why it is necessary?
Stablecoins are required to protect users' funds from the instability of the Bitcoin market and national fiat currency inflation. Many countries are unable to contain inflation in their national currencies, and the value of their currencies continues to fall. Venezuela, Zimbabwe, and Argentina are the best examples of countries where inflation is extremely high and people are turning to Bitcoin and other cryptocurrencies to make a profit.
In this case, stablecoins are critical in combating inflation. Stablecoins can be quickly transformed into other cryptocurrencies. Since there are no bank or settlement fees, these transactions are fast and inexpensive as compared to fiat currency transactions.
Different stablecoin trading pairs are available on cryptocurrency exchanges. Users will be able to convert their assets into stablecoins in the event of a market downturn. Following the success of Binance Coin, the leading cryptocurrency exchange plans to introduce its own stablecoin (BNB).
Is it Possible for Stablecoins to Achieve Complete Decentralization?
NO is the answer to this question.
The majority of stablecoins are pegged to the US dollar, and many analysts agree that the cryptocurrency's value is determined by the US banking system. The banks' supply and reserve are handled by a centralized entity, which is the polar opposite of Satoshi Nakamoto's vision from a decade ago.
Equilibrium claims to have decentralized its stablecoin (EOSDT), which is overcollateralized to the tune of 170 percent. As a result, the price of EOSDT will still be $1. "The world's first decentralized collateral-backed stablecoin based on the EOS blockchain," according to the business.
Problems with Stablecoins
In the crypto world, stablecoins are often a contentious subject. Tether, the well-known stablecoin, has been in the news a lot in recent months. According to research, the coin is used to control the Bitcoin price.
The question of whether the reserve in banks and the circulating supply are in a 1:1 ratio is often raised. According to recent estimates, only 74% of Tether coins are backed by the US dollar. Tether funds were used by Bitfinex, a Tether affiliate official partner, to recover a loss of $850 million.
