Hey guys, welcome back to Zilliqa Zebra. In this video, learn about stablecoins and find out why they are an important aspect of cryptocurrency.
Content
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a. What is a stablecoin?
b. 4 types or categories of stablecoins
c. Algorithmic stablecoins
d. Crypto-collateralized stablecoins
e. Commodity-collateralized stablecoins
f. Fiat-backed stablecoins
g. Tether and USD Coin
h. Benefits of stablecoins
Hey guys, welcome back to Zilliqa Zebra. In this video, learn about stablecoins and find out why they are an important aspect of cryptocurrency.
As always, don’t forget to like and subscribe to Zilliqa Zebra for all things related to Zilliqa and cryptocurrencies.
A stablecoin is a new class of cryptocurrencies that mirrors the price stability of fiat currencies and is backed by a reserve asset. Stablecoins have gained traction as they try to offer the best of both worlds — the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
As with any emerging asset class, cryptocurrencies can be susceptible to market forces. Current solutions go well beyond the buy, sell, and stop orders of conventional markets. Instead, price stability is being built directly into the assets themselves. The result is an entirely new subset of the cryptocurrency market known as stablecoins, hence the name.
There are 4 main categories that stablecoins can fall into: Algorithmic ,Crypto-Collaterialized Commodity-Collateralized, and Fiat-collaterialized stablecoins
Algorithmic stablecoins maintain stability through an algorithm or working mechanism. Smart contracts are in charge of managing the supply and demand scheme and guarantee stablecoin’s price stability. They are not backed by fiat or cryptocurrency. Instead, they are pegged by algorithms and smart contracts.
To put it in simple terms, the algorithmic stablecoins uses an algorithm underneath which issues more coins when price increases, and buys them off the market when the price falls. Presently, the longest-running algorithmic stablecoin is Ampleforth (AMPL).
Crypto-collateralized stablecoins use cryptocurrencies as collateral. Thus, the entire process runs and operates on the blockchain in a decentralized manner. Because of cryptocurrencies’ highly volatile nature, a larger number of the cryptocurrency will be held in collateral for every stablecoin. This way, the supply of stablecoins won’t be affected by extreme price fluctuations. An example of this is Dai (DAI), which is backed by collateral on the Maker platform.
Commodity-collateralized stablecoins are backed by other kinds of interchangeable assets, such as precious metals. The most common commodity to be collateralized is gold — however, there are also stablecoins backed by oil, real estate, and various precious metals.
Holders of commodity-backed stablecoins essentially hold a tangible asset that has real value — something most cryptocurrencies do not have. These commodities even have the potential to appreciate in value over time, which gives increased incentive for people to hold and use these coins.
Fiat-backed stablecoins is the most popular, which is directly backed by fiat currency with a 1:1 ratio. A central issuer holds an amount of fiat currency in reserve and issues a proportionate amount of tokens. There is a high degree of counterparty risk here that can’t be mitigated: ultimately, the issuer must be trusted. There is no way for a user to determine with confidence whether the issuer holds funds in reserve.
When someone wants to redeem cash with their coins, the entity that manages the stablecoin will take out the amount of fiat from their reserve and it will be sent to the person’s bank account. The equivalent stablecoins are then destroyed or taken out of circulation.
The most popular stablecoin is Tether (USDT), which is currently the third-largest cryptocurrency by market capitalization and has the highest daily trading volumes of any cryptocurrency, including Bitcoin. However, the cryptocurrency has been surrounded by plenty of controversy. Suspicions have arisen that Tether has issued more USDT than is actually backed by its USD reserves. The US Department of Justice has investigated Tether and crypto exchange Bitfinex, which share management teams, for potential market manipulation.
For this reason, many new fiat-collateralized stablecoins have risen up in an attempt to take Tether’s place. One such example is USD Coin (USDC), which is also backed by the US dollar and is managed by a consortium including crypto finance company Circle and exchange Coinbase. Each month, a report is published attesting to the actual USD reserves that back up the supply of USDC.
Like tens of thousands of cryptocurrencies available in the market today, stablecoins also aim to provide developed functions of traditional money across the world. Let’s take a look at some of their significant benefits.
Stablecoins are designed to have a stable value over any time. Because of this, a lot of crypto nvestors consider them an ideal safe-haven asset. The value of fiat money and major cryptocurrencies are experiencing dramatic spikes and plunge every single day, which is why stablecoins are an excellent option for people looking for ways to preserve their wealth. They can store their wealth in an asset without seeing any risk of loss due to inflation.
Stablecoins are a type of cryptocurrency.This means they share the same powerful technology and systems that run thousands of other cryptos. However, while cryptocurrencies have a decentralized nature, there might still be a need for ties with a fiat currency’s banking system.
Stablecoins are programmable and can be designed to fit the users’ needs since they are “fundamentally made up of code.” One common way of implementing this is through rewards or loyalty programs. If a company builds its program on top of its stablecoin, they can design an application where users can easily and quickly check their stablecoin and rewards at once.
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