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INTRODUCTION
Generally, Cryptocurrencies have always had high volatility as a characteristic property; Prices change from time to time and are reliant on various factors. The cause for this high volatility is due to the fact that cryptocurrencies are usually not issued by a centralized authority like the government that regulates its value and they're also not backed by reserve assets.
While high volatility has allowed for easy trade of cryptocurrencies for profits, sometimes it could also be of a disadvantage as coins can tend to drop in price value leading to losses to holders. This is where the idea of 'stable coins' comes in.
DEFINITION
A stable coin is a special form of cryptocurrency that is usually backed by a reserve asset and designed to help minimize the problem of high volatility, thus attempting to offer a reasonable amount of price stability.
Since their inception, Stablecoins have offered themselves to be a bridge between the world of fiat currencies and the crypto world as they basically possess the general characteristics of most cryptocurrencies and still offer price stability as with fiat currencies.
BRIEF HISTORY
The first noticeable stable coin called BitUSD was launched in July 2014 as a token on the BitShares blockchain. BitUSD was a crypto-backed stable coin having the BitShares core token (BTS) as its main collateral, locked in a smart contract.
Shortly after BitUSD launched, later in September 2014, another stable coin was created. It was called NuBits and operated based on a Seigniorage system. This made room for a lot of criticism and in the long run, NuBits failed as a stable coin as it could no longer continue to maintain its peg.
In early 2015, another major stable coin called Tether was launched. Tether was pegged against the USDollars and though it was criticized as well, it still remains the top and largest stable coin in the world. Tether currently takes the place of the third-largest cryptocurrency by market cap.
CLASSIFICATIONS OF STABLE COINS
For general simplicity, stable coins can be classified into three major classes base on which collateral they are backed by;
1.CRYPTO-BACKED STABLE COINS
These types of stable coins are backed by other cryptocurrencies. Usually, the cryptocurrency used to back this type of stable coins is done on the blockchain, using smart contracts, and is completely decentralized. The price stability of these types of stable coins is achieved through the introduction of supplementary instruments and incentives, and not just the collateral assets they are backed on.
A popular example of this type of stable coin is the DAI stable coin.
2.FIAT-BACKED STABLE COINS
Fiat-backed stable coins are stable coins that are pegged against the fiat currency of a country in a fixed ratio. Common fiat currencies used are the United States Dollar and Euro.
These types of stable coins are the most common types of stable coins and the currencies to which they are pegged against are usually issued and regulated by a central financial entity.
Common examples include Tether (USDT) and TrueUSD (TUSD)
3.NON-COLLATERAL-BACKED/ ALGORITHMIC STABLE COINS
These types of stable coins are not backed by any asset and thus, their price stability and money supply are regulated and adjusted by the utilization of a special on-chain algorithm.
Non-collateral-backed stable coins are the least common types of stable coins.
ADVANTAGES OF STABLE COINS
Stable coins can be used as media for global transactions.
Stable coins help solve the problem of high volatility in cryptocurrencies.
Because stable coins are backed by real assets, tangible value can be attached to them.
They are ideal options for cross-border payments by central banks and businesses.
Lower fees are required to transfer stable coins.
COMMON EXAMPLES OF STABLE COINS
1.TETHER (USDT)
2.USD COIN (USDC)
3.BINANCE USD (BUSD)
4.PAXOS STANDARD (PAX)
5.TRUEUSD (TUSD)
6.DAI STABLE COIN (DAI)
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