The cryptocurrency industry is growing fast. However, it’s still in the early stages, and one of the major concerns for market participants are price volatility. The volatility in cryptocurrency prices has resulted in the inability to use them seamlessly as a medium of exchange.
The innovation of stablecoins presents a solution that helps achieve price stability while retaining critical components of cryptos. Stablecoins are often viewed as the gateway to crypto markets because of their versatility and dependability.
With that said, in this article, we will discuss a comprehensive guide to stablecoins. So, let’s dive right in and find out more.
Essentially, stablecoins are digital assets pegged by gold or fiat currencies on a ratio of 1:1 to gain a more stable value. Stablecoins offer the best of both the crypto and traditional currency world. They present users with the high security and speed of cryptocurrencies and the stability of fiat. With that said, some of the expected benefits that we get from stablecoins include;
- Transactions being settled in real-time
- Peer to Peer transfer of value
- High-security standards with hashing, encryption and cryptography
Which are the Most Popular Stablecoins?
We currently have a list of more than 200 stablecoins. 30% of them are active, 10% have been discontinued, while the other 60% is still conducting R&D. Over the years, stablecoins have been growing tremendously. Currently, the total stablecoins supply is hovering around 12 million. With that in mind, some of the most popular stablecoins include;
- USD Coin; The USD coin is a popular stablecoin launched by Coinbase, Circle and CENTRE Consortium. It is pegged to the US Dollar at a ratio of 1:1. The fact that the USDC is based on the Ethereum blockchain helps you achieve faster and more secure transfer of value at an affordable transaction cost.
- Tether; Tether stands as the world’s first and biggest stablecoin with a market cap of $10 billion. It is also pegged to the US Dollar as well at a ratio of 1:1.
- TrueUSD; TrueUSD is considered the most reliable stablecoins in the market. This stablecoin is also backed by the US Dollar and has over $1.8 million in its reserves.
- Dai; Dai was developed by Maker and is currently the most popular decentralized stablecoin. The coin is governed by a community of the Maker token holders. Dai is pegged to the US Dollar at a ratio of 1:1. Currently, the Dai coin has been integrated with over 400 apps.
- Paxos Standard; Pax stands as the one stablecoin that was quickly adopted by the cryptocurrency community. It is pegged to the US Dollar at a ratio of 1:1. The Paxos standard tokens are destroyed when users redeem the coin for USD.
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How do Stablecoins Work?
In essence, Stablecoins aim at offering stable value. This means that the value of stablecoins doesn’t fluctuate as other cryptocurrencies such as Ethereum and Bitcoin. And since stablecoins such as Tether and USDC are pegged to a fiat currency, they need a custodian whose work will be to regulate the currency and maintain its fiat reserve.
Unfortunately, that means the coins rely on the issuing party’s honesty in honoring the withdrawals and deposits made. On the other hand, we have decentralized stablecoins such as Dai that depend on the supply and demand forces. That means decentralized stablecoins are not issued or controlled by any organization. In essence, they use smart contracts to maintain order and manage collateral.
The Different Types of Stablecoins
There are four different types of stablecoins. Usually, the varieties are categorized depending on the collateral these stablecoins are backed by.
1. Fiat-Collateralized Stablecoins
These are the most common stablecoins that exist today. Fiat-collateralized stablecoins are fully backed by fiat currencies such as the US Dollar, Euro or GBP in a 1:1 ratio. That means the company reserves 1 USD for every stablecoin. The most commonly known stablecoins are Tether and TrueUSD.
2. Crypto-Collateralized Stablecoins
These stablecoins are pegged to other cryptocurrencies. However, the entire concept of crypto-collateralized stablecoins defies the purpose of stablecoins. Cryptos are very volatile in nature; therefore, a large reserve is required to cover the significant price movements. The peg ratio is not 1:1 like the others. In this case, the reserve keeps 2 or 3 tokens for every stablecoin. Dai and BitUSD are typical examples of crypto-collateralized stablecoins.
3. Commodity-Collateralized Stablecoins
In so many ways, commodity-collateralized stablecoins are similar to fiat-based stablecoins. The only difference is that the stablecoins are pegged to silver, gold among oter commodities in this case. A typical example is Digix.
4. Non-Collateralized Stablecoins
These stablecoins are not backed by any specific asset. Instead, they mainly depend on a set of complex algorithms to automatically maintain the stability in their price. Some famous examples include; Carbon, kUSD, and Ampleforth (AMPL).
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What are the Advantages of Stablecoins?
As we have seen so far, stablecoins present a wide range of benefits to their users and the fintech industry at large. Some of these advantages include;
1. Stablecoins Have Cheaper and Faster Remittance
With stablecoins, you get a cheaper, quicker and definitely more secure way of remitting funds across borders. That makes things easier in our current system that tends to have a slow and expensive network.
2. They Reduce Price Volatility
A significant advantage of stablecoins is the fact that they provide price stability. They eliminate the volatility that comes with cryptos.
3. They Offer Benefits of Both Worlds
Stablecoins offer users the simplicity and stability of fiat as well as the security and high transaction speed of cryptocurrencies.
4. dApp Integration
Another impressive thing about stablecoins is that they can be integrated with applications to enable in-app purchases. Also, they help facilitate other payments in the decentralized app ecosystem.
5. They are blockchain-based
Just like other cryptocurrencies, stablecoins, too, are backed by blockchain technology. That ensures the larger masses enjoy the key benefits of blockchain; accountability, transparency and security.
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As seen in this article, stablecoins play a vital role in securing and enabling digital payments while maintaining a stable value. What’s more, stablecoins are also opening doors for mainstream adoption of cryptocurrencies. While they have incredible perks that would easily make stablecoins the solution to most of the financial problems we face today, it’s hard to predict what the future holds. All in all, stablecoins have proven to be a significant step in embracing digital currencies.