Steemit Crypto Academy week 6 - Stable coins
The Crypto market is a highly volatile market and this is one of the major challenges and set back to the mass adoption of Cryptocurrencies. Crypto cannot be trusted by merchants as a reliable means of exchange for their goods due to their high volatility. Stable coins were introduced in order to bridge up the gap between the fiat world and the Crypto world. These offer a solution to the high volatility challenge in the Crypto market.
What are Stable Coins?
Stable coins are a type of cryptocurrencies with a fixed price value, pegged to other more stable assets. They can be pegged to fiat currencies, cryptocurrencies and others on real-world commodities such as Gold.
The relevance of Stable coins
Alleviates Economic uncertainty
Developing countries such as Venezuela, Uganda, Zimbabwe are usually affected by currency devaluation in relation to other highly valuable global currencies like the US dollar. For example, a scenario happened in Zimbabwe where the Zimbabwean dollar lost value due to hyperinflation. For someone to purchase bread, he needed to carry a full basket of Zimbabwean dollars in order to purchase bread. Such scenarios can be converted through the use of Stable coins as a better alternative to the developing countries’ unstable currencies.
Used in Hedging of funds
Crypto traders use stable coins as a way to curb the risk of making losses due to the high volatility in the Crypto market. For example, when the Bitcoin price is assumed to be going to decline in value following the negative news spreading around, the crypto traders immediately withdraw their investments from Bitcoin and resort to safeguard it through buying and holding stable coins like Tether(USDT), hence the term “hedging of funds.”
Stable coins offer a unique aspect of price Stability in the world of digital currencies thus helping in maintaining the people’s purchasing power and trust/reliability in such a currency.
Act as a bridge between the Crypto and Fiat world.
Cryptocurrencies haven’t yet been fully accepted as a means of exchange and store of value by many people on this planet. Many are still locked up /prefer using fiat currencies than Crypto due to the uncertainties in Cryptocurrencies. The stable coins help to bridge that gap between the Crypto space and the fiat world.
Crypto traders and investors don't have to go a long way to cash out their crypto into fiat and then redeposit it in the banks in order to purchase Crypto again. They rather use Stable coins which facilities the easy movement of their funds while making their trade and investment decisions in their time to time Crypto dealings.
Categories/types of stable coins
Fiat- Collateralized stable coins
These are stable coins that are backed by Fiat currencies. They are usually pegged to the USD, EUR, for example, Tether (USDT), TrueUSD (TUSD). They rely on a central unity (company) that stores their fiat reserves. Every Stable coin has an equivalence of $1, evenly distributed in a ratio of 1:1.
The amount of tokens in circulation is equivalent to the amount of Fiat reserves that are kept by the Central unity. The central unity that keeps the fiat reserves has to be trusted on the account of maintaining the proper balance of the stable coins’ circulation and its fiat reserves.
Whenever someone cashes out/exchanges their stable coins, the central unity destroys those coins after issuing that person with the fiat currencies from its fiat reserves. In other words, central unity controls the supply of the stable coins ensuring that its fiat reserves stay equated to the tokens in circulation.
Crypto- collateralized stable coins
These are Cryptocurrencies with a fixed value that is backed up by other Crypto assets. These are usually backed up by major Crypto assets including Bitcoin, Ethereum. Cryptocurrencies are highly volatile. In order for this type of Stable coins to achieve stability, they combine 2 cryptocurrencies that act as collateral for that particular stable asset. This category of stable coins is over collateralized.
DAI is one of the best examples of such a type of stable coins which is backed by Ethereum(ETH) and Maker($MKR) through the MakerDAO protocol. In order to be issued with DAI, you have to present a bigger collateral sum of Ether that is locked up and act as a backing for the issued DAI. For example for $200 worth of Ether tokens presented as collateral, I can only be issued with $100 worth of DAI. This is done in order to maintain the stability of DAI.
Commodity collateralized stable coins
These are stable coins that maintain a fixed value regardless of the volatility in the Crypto market. They are backed up by the value of commodities such as precious metals including Gold. They have Gold reserves that act as a backup for the tokens in circulation. Digix (DGX) is the best example of a commodity-backed stable coin whose value is backed up by Gold.
Non – collateralized stable coins
These are stable coins with a fixed value that is ensured through a complex algorithm. Unlike the above-mentioned types of stable coins, these are non Collateralized stable coins. Their price stability is maintained through a complex consensus algorithm that is managed by a central unity(company). The central unity ensures that they control the supply of the tokens in the market in order to ensure the stability of the stable coin. Base coin (Basis) is one of the best examples of such a category of stable coins that are non-collateralized.
Homework task: Write about any one of the following stable coins;
- Steem backed dollar(SBD)
Rules and Guidelines to follow
- Post your homework articles in the steemit Crypto academy community.
- Only steemitexclusive homework posts will be curated.
- Use an exclusive tag #yohan2on-week6. You can as well tag me @yohan2on so that I can easily find your article.
- Plagiarism and spinning other users' articles will not be tolerated.
- Your article should not be less than 300words and it should not exceed a maximum of 1000words.
- Use copy-right free images and showcase their source.
- The homework task runs till 21/03/2021