A stablecoin is a cryptocurrency that functions similarly to other cryptocurrencies but differs in volatility. Unlike other cryptocurrencies, they promise stable value. Stablecoins are pegged to or backed by other currencies or commodities, such as the US dollar or gold, to maintain their stable value. Why and When Were Stable Coins Invented? Early adopters began to accept Bitcoin as a new payment standard due to its accessibility, convenience, speed, and security regardless of location. The only problem was its notorious volatility. Even today the biggest cryptocurrencies like Bitcoin and Ethereum suffer wild swings of more than 10% in just a couple of hours. Such volatility can be scary, especially for merchants who accept crypto payments. Just imagine the face of the person whose crypto payment plummeted moments after being received. To avoid such traumatic facial reactions, the first stablecoin, BitUSD, was introduced in 2014. It was released on the BitShare blockchain as a token by two eminent Blockchain leaders, Charles Hoskinson and Dan Larimer. The Advantages of Stablecoin Since its inception in 2014, stablecoins have become an important aspect of people’s lives, which is visible given their massive market caps. The cumulative market cap of the top 10 stablecoins touched $160 billion in March 2022, according to Statista. Here is a list of stablecoin benefits that serve as the driving forces behind their widespread success. The only reason why Bitcoin’s growth is hindered as a medium for exchange is its wild volatility. Stablecoins solve this by incorporating Bitcoin’s essentials — a tamper-proof transaction ledger with no third-party involvement — while mirroring real-world currencies. Powered by Blockchain- The whole world knows how cross-border remittance was a pain in the ass before the vogue of cryptocurrencies. Stablecoins made remittances even more doable with their stable value and other benefits of cryptocurrencies, such as security, speed, and transparency. Cross-border remittances- Unlike most cryptocurrencies, stablecoins are a safer investment as tangible world assets or financial instruments back them. Safe to invest- Stablecoin is the best option for traders to flip their crypto during turbulent market conditions. It is very convenient to convert cryptocurrencies like Bitcoin and Ethereum to Stablecoin compared to fiat conversions. Protection for traders- Why Do Stablecoins Need Backing? Since Stablecoins are not there must be a reason to trust them. Hence, stablecoins are backed by different real-world commodities and currencies. By becoming entangled with or pegged to more established traditional investments, they boost market confidence. As a result, they are often the go-to option for institutional and retail investors. legal tender, Based on what is used to back or collateralize a stablecoin, there are 4 types of stablecoin. 4 Different Types of Stablecoins Let’s learn about each of the stablecoin types in brief. Fiat-Collatarized Stablecoin Fiat-collateralized stablecoins are the most popular ones, backed by fiat currencies such as USD, EUR, or GBP at a 1:1 ratio, meaning each stablecoin can be exchanged for one unit of the fiat currency. This type of stablecoin maintains a reserve of one or multiple fiat currencies as collateral to maintain its peg. Companies that offer such stablecoins must ensure that the number of minted coins doesn’t exceed its fiat counterparts. i.e. If there are a total of 1 billion tokens in circulation, then the fiat reserve must also equal 1 billion. Tether, Gemini Dollar, and USDP are some examples of fiat-collateralized stablecoins. Commodity-Collatarized Stablecoins The commodity-collateralized Coins are backed or collateralized by valuable real-world commodities such as Gold, Platinum, Oil, or even Real estate. Collateral or commodity used to back the stablecoin is often reserved in third-party vaults. Gold is the most common commodity used to back stablecoins, which has a proven track record of value appreciation. Some popular examples include Tether Gold (XAUT) and Paxos Gold (PAXG) . Crypto-Collatarized Stablecoins A crypto-collateralized stablecoin is backed by other cryptocurrencies, as you’d have already guessed from the name. Since cryptocurrencies are highly volatile, a 1:1 ratio doesn’t work here: the reserved cryptocurrency for backing must be at least 2–3 times more than the stablecoin to maintain the peg. Examples include WBTC, Dai, and BitUSD, among others. Algorithmic Stablecoins In Algorithmic Stablecoins, Collateral is replaced by an Algorithm, unlike other collateral-based coins. This means the price stability of the coin pegged to any asset(could be fiat or gold) relies on algorithmic mechanisms instead of collateral such as currencies or commodities. The algorithm constantly works to maintain supply, i.e., if the price rises, the algorithm will modify itself to issue more coins, and if the price falls below the pegged value, the algorithm sells the coins. Some examples include Frax Ampleforth (AMPL), Kowala (kUSD), Frax, etc. Are Stablecoins Safe? I completely got baffled while looking for this question’s answer. But I eventually got some idea. If you go back a little back in history, you’ll see there have been multiple And most of them are related to ; the latest is a spine chiller. . stablecoin Fiascos Algorithmic Stablecoins TerraUST fiasco Does that mean collateralized stablecoins are safe? The answer to this could’ve been a yes, but since the market for stablecoins is highly unregulated, we can’t say anything. Even the most successful stablecoins have failed to justify their name(Stablecoin) as they often lose their peg. What further exacerbates the trust factor is that the most successful stablecoin is also the most controversial. , the biggest stablecoin by market cap, refuses to go under an audit. The excuse they rely on is they don’t want regulators to know how US dollars turn into Tether. Tether, or USDT But despite all the chaos in the stablecoin market, it is not sufficient to say you should avoid it. Stablecoins are unavoidable as they are an offering considered the best of both worlds between traditional currency and crypto. Buying cryptocurrencies with stablecoins is so convenient. So, I won’t be robbing you of your pleasure of buying a stablecoin. Below are the steps you should always consider before choosing your stable cryptocurrency. Choosing an ideal Stablecoin. Traditional Backing The peg of a Stablecoin entirely relies on what’s backing it. If the commodity that backs it is a volatile cryptocurrency, the chances of de-pegging are high. Any stablecoin backed by proven traditional world commodities such as Gold or the US Dollar can be a good option, at least for now. Transparency Before buying a particular stablecoin, you must also research the company issuing these coins. These are some of the critical questions to consider. Does the company perform regular audits? Is the company transparent? USDT vs USDC Both of these are the top 2 Stablecoins as per market cap, but the reason why critics choose USDC over USDT, is pretty straightforward: USDC is issued by — a joint venture between and Both of which are well-known names that operate transparently. Moreover, an independent third party audits USDC’s 1:1 ratio with USD. CENTER CIRCLE Coinbase. In the case of USDT, the number one stablecoin, it is still under scrutiny by legal organizations. Some lawsuits have also claimed earlier that it doesn’t maintain the 1:1 peg. The latest , released by Tether, shows that the company has reduced its commercial paper holdings. The report also highlighted Tether’s safe treasury bill’s increased holdings. quarterly assurance report for 2022 Q1 But since of the is still held in loans and other assets, we can’t say if cash equivalents of $82bn fully back it. $12bn $82bn Future of Stable Coins It is evident that cryptocurrencies are here for the long haul. No matter how often punitive Governments tried to beat them down, the craze for them is unlikely to wane. Stablecoin, on the other hand, are cryptocurrencies that offer stability — a thing that the whole world craves. Stablecoins are something people genuinely need because of the benefits they bring to the table. TerraUST’s tumble is, of course, a spiteful event and has caught a lot of regulatory attention. The US congress might even pass legislation anytime soon to create a , as revealed by . regulatory framework for stablecoins Janet Yellen While a regulatory framework would address many of the issues preventing stablecoin adoption, we can’t comment on what implications can come with it. The story was first published here.

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Stable Coin: Everything You Need to Know

Stable Coin: Everything You Need to Know

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