Stablecoins are cryptocurrencies which price is pegged to fiat currency, sometimes to exchange-traded commodities such as gold, oil, palladium. Most often they are pegged to reserve currencies such as the US dollar, euro, British pound. Today I will talk about the purpose of stable cryptocurrencies, their classification, and prove why stablecoins are a must in the portfolio of every crypto investor.
The essence
Many are annoyed by the excessive volatility of Bitcoin and other currencies. Traders, as a rule, benefit from volatility because it is a way for them to make money quickly. But if it is so high that the price of an asset changes during the time of the transaction, then even traders are not happy about it. Neither the buyer nor the seller will like it if, due to volatility, the price of the product/service changes.
In the case of stablecoins, there is no such problem. The rates of fiat currencies change over time too, but much less than the price of cryptocurrencies. Therefore, a stablecoin as the digital equivalent of a fiat asset combines the advantages of the digital world with the relative stability of traditional finance.
Stablecoins pegged to fiat currencies
The most popular stablecoins are pegged to fiat currencies, most often to the US dollar as the world’s most reputable and popular currency. The first stablecoin Tether (USDT) was launched in 2015 by Tether Limited on the Omni Layer blockchain. The company claimed that each token is backed by US dollars at a 1: 1 ratio.
Today, USDT is the most popular stablecoin; in the rating of the authoritative Coinmarketcap price and value-tracker, it is ranked third in terms of capitalization among all cryptocurrencies. Today USDT has launched on multiple blockchains including Ethereum, Tron, EOS. Most of the USDT tokens in circulation are issued on Ethereum — about 44%.
Stablecoins pegged to commodities
A stablecoin can also be pegged to commodities. The most famous coins of this type are tied to gold and oil. Such cryptocurrencies are issued by countries that have solid reserves of natural resources and are under sanctions.
For example, at the end of 2017, Venezuela issued El Petro cryptocurrency that was backed by proven oil reserves. With the help of cryptocurrency, the country tried to cope with the financial crisis and bypass international trade and payment restrictions. There have even been attempts to pay salaries to civil servants in this cryptocurrency. But in the end, the project stalled.
In early 2019, Iran launched the gold-backed cryptocurrency Paymon. It was assumed that with this stablecoin it would be possible to bypass international sanctions. There is enough gold mined in Iran for a stablecoin to be fully backed.
Stablecoins pegged to cryptocurrencies
It looks paradoxical to back one cryptocurrency with another. However, the first such stablecoin appeared back in 2013, it was BitUSD, the cryptocurrency of the BitShares exchange. The idea of stabilizing one cryptocurrency at the expense of another is that the movement of assets in the free market is multidirectional.
Unsecured (algorithmic) stablecoins
The idea behind such a stablecoin is simple: its stable exchange rate is ensured by the balance of supply and demand. If the rate rises above one dollar, additional tokens are launched into circulation until the rate drops.
One of the most famous projects of this kind is Basecoin. Unsecured stablecoins are believed to be completely decentralized, completely independent of other cryptocurrencies, and fiat money. DAI is the most decentralized currency as its founders claim, it runs on the Ethereum blockchain.
Drawing the line
Stablecoins are an important segment of the cryptocurrency market. Traders use them as a “safe haven” in times of turbulence to take profits. Good prospects for this type of cryptocurrency for their use as a means of payment.
In general, such a cryptocurrency combines the best of the world of fiat and digital finance — stability, speed, reliability, and low fees.
Now it is time to act. You can buy stablecoins USDT in my neobank: go to the [Exchange] section, select USDT, the fiat currency for which you want to buy crypto, and make a deal with the seller.
I wish you all a “stable” weekend! With love, Chatex.
