Why Deflationary Stablecoin Projects are the Future of DeFi by@eugenefried

Why Deflationary Stablecoin Projects are the Future of DeFi

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Eugene Fried

I am an experienced content writer having core knowledge of Blockchain Technology.

Similar to fiat-backed stablecoins, cryptocurrencies-backed stablecoins are issued with cryptocurrencies as collateral. Unlike fiat collateralization, which is usually done off the blockchain, the cryptocurrency or crypto asset used to back this type of stablecoin is done on the blockchain using smart contracts in a more decentralized manner.Β 

In the crypto world, stablecoins such as USDT and USDC have become indispensable. We use them to store non-volatile value, which enables us to maintain our purchasing power from day to day. Unfortunately, the United States Dollar does not work in this way. The Federal Reserve is in charge of creating dollars, and its fiscal policies have caused the currency to depreciate on a regular basis. This suggests that a dollar is currently worth more than it will be in the future.

Stablecoins were intended to allow day traders or investors who make money from crypto trading to do so on a regular basis. It also enables individuals to store the value of their deposited assets or wealth on unlicensed and unregulated exchanges that do not let clients link their bank accounts to the platform. Consumers may no longer use bank transfers or any other kind of fiat money on some of the world's most popular cryptocurrency exchanges, such as Binance.

While some big exchanges, including Binance, are increasingly adding fiat trading into their platforms, stablecoins are particularly useful for non-fiat accepting exchanges during moments of significant speculative cryptocurrency price volatility. Traders who sell speculative cryptocurrencies incur negative slippage, whereas those who convert them to stablecoins may only have to pay transaction fees to centrally issued stablecoin issuers or stability fees to their decentralized counterparts. When traders convert their speculative assets into stablecoins, some decentralized stablecoins, such as Hector Finance's TOR, may be so efficient that they lose almost no financial value other than transaction fees on the blockchain on which their transactions occur.

Stablecoins that are centralized go against the decentralization mantra. Due to the various legal concerns connected with exchanging traditional digital money with centralized stablecoin issuers, a wave of businesses has set out to create decentralized solutions that provide the on-chain financial stability that most cryptocurrency day traders want.

Centrally issued stablecoins also prevent people in countries like Sudan from using their cryptocurrency as a safe haven against hyperinflation β€” a potential that decentralized alternatives like TOR will almost surely seize. In addition to preventing users from using their cryptocurrencies in politically hostile countries, centralized stablecoins also prevent users from using their cryptocurrencies for a variety of financial activities that are perfectly legal in the United States and most other jurisdictions. In its terms of service, section 24. These are the types of legal constraints that ensure centrally manufactured stablecoins will always be nothing more than digital IOUs that can be sold on exchanges.

Decentralized stablecoins, on the other hand, are not subject to any of these legal constraints and have the potential to gain widespread adoption outside of the closed economies of cryptocurrency exchanges

Top Deflationary Stablecoins in the Market

Collateralized or non-collateralized economies make up the majority of decentralized stablecoin monetary systems. Terra, for example, is a source of inspiration for TOR (UST). In the space, this is the only successful and pure algorithmic stablecoin. TOR is a brand new ERC20 coin that can only be made by consuming HEC.

The technology used to maintain the price consistent in the Terra blockchain makes stablecoins unique. Terra assets represent algorithmically stable coins, rather than relying on a reserve of assets to maintain their peg, as USDC and USDT do. This entails utilizing a smart contract-based algorithm to keep the price of UST anchored at $1 by burning (permanently destroying) LUNA tokens and minting (creating) new UST tokens. Users in the Terra ecosystem can always exchange one LUNA for UST for $1, regardless of the market price of either token at the time. This is significant because it means that if demand for UST grows and its price increases over $1, LUNA holders can make a risk-free profit by exchanging $1 of LUNA for one UST token (which, in this case, is worth more than $1 owing to increased demand).

Time Weighted Average Price is used to build the HEC pricing oracle. It can be used to exchange newly minted HEC (redeemed) for TOR (TWAP). Oracle is a crucial aspect of the underlying functioning of Stablecoin. Oracle is a technique for supplying data to smart contracts in more depth. Because the price of Stablecoin remains constant, it is valued and trusted. The cost of TOR is one dollar.

Similarly, TOR is a brand new ERC20 coin that can only be created by burning HEC. The HEC pricing oracle, which uses Time Weighted Average Price, can be used to swap TOR for freshly minted HEC (redeemed) (TWAP). Oracles are an important part of any stablecoin's core operation. An oracle is a system built to supply data to smart contracts in the context of blockchain technology. In general, a Stablecoin is respected and trusted only if its price remains constant. The market capitalization of TOR is $1. What exactly does it mean when it says it's backed? TOR's backing is divided into two layers: Smart-contract algorithms and the HEC/stable LP and Hector Finance Treasury.

Stablecoins with collateral are less risky than those without, but depending on the aggregate demand for multi-currency stablecoins in the long run. The stablecoin start-ups will have the option to pick between the effective global currency and the utility regional currency. This will take effect regardless of how they design their respective monetary systems.


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