Today, we will tackle down the topic of stablecoin that Tecra is planning to issue. The main difference between digital currencies and traditional currencies of each country is their high volatility. Stablecoin, however, as its name suggests, is supposed to minimize this volatility and ease users' minds about it. In the following article, you will learn more about this digital currency and its advantages and disadvantages.
What is Stablecoin?
Stablecoin is a type of cryptocurrency designed to reduce price fluctuations and is used as a store of value as well as means of exchange. Stablecoin is dependent on a "fixed asset". This fixed asset can be anything; from gold to fiat currency or assets that can be priced and agreed upon. They are supported and built by a large company to facilitate financial transactions for users and to create ideal conditions for them. Large banks and government-affiliated financial institutions are also sources of these digital currencies.
What was the original purpose of designing Stablecoin?
Stablecoins were introduced to the market to deal with the fluctuations of cryptocurrencies. Unlike other digital currencies that do not have a stable price, stablecoins protect investors from sharp fluctuations in the price of digital currency.
Why are stablecoins so important?
Many people believe that the reason why Bitcoin, as a digital currency, has been so badly accepted at first is its price fluctuation. Although many traders benefit from this phenomenon, the majority of the public make their daily payments through an unstable and unpredictable currency. Unsurprisingly, people tend to prefer to use a currency with a stable value. As a result, the currency needs price stability in order to be widely used and accepted. In fact, this is the current gap between the traditional physical currency system and the cryptocurrency market. Therefore, stablecoins were introduced to provide a level of stability for the cryptocurrency market so that people could use their tokens for daily payments without worry. The aim of creating stablecoin is to make them a bridge between fiat currencies and cryptocurrencies.
7 advantages of Stablecoin
Low transaction cost
Fast and secure transactions
Ability to transfer assets digitally
Stability, backed by an asset
Use of Blockchain technology: This system provides security, transparency and traceability
Simplicity: This system is easy for users of digital currencies and fiat currencies to understand
Smart contracts: to protect all parties to the investment transaction
5 disadvantages of Stablecoin
It is centralized
Needs a third party to build trust
It needs an external audit to ensure the value of the assets
Get lower returns on investment (as a result of which traders and investors will look for other ways to make a financial profit)
It is time consuming due to the newness of this technology and problems with public acceptance.
Types of stablecoins
At the high level, there are three types of stablecoins. Stable coins are categorized based on the type of support they provide.
- Fiat-Collateralized coins
- Crypto-collateralized coins
- Non-collateralized coin
The most common type of stablecoins are those with the support of their fiat currency. Due to its high popularity and support from governments, physical currency is currently the largest financial transaction. Therefore, using this support for Stablecoin also increases users' trust. Fiat is the national currency of the country which issued it, in fact the paper money in your wallet and bank account. Examples of physical currencies include USD, EUR, CHF, GBP and JPY. "StableCoin backed by 1: 1 fiat-collateralized means that $ 1 of StableCoin is equivalent to $ 1 of fiat currency. "This Stablecoin is actually the simplest and, of course, most focused type."
Pros of Fiat-collateralized stablecoins:
Simplicity: The structure of this type of collateral is easy to understand.
Stability: Physical currencies are a stable asset because they are supported by the government and the economy of a country. This ensures that prices do not fluctuate too much.
Reliable: Stablecoins backed by physical currency can be considered the most reliable digital currency for ordinary users.
Cons of Fiat-collateralized stablecoin:
Centralized structure is prone to various vulnerabilities and risks such as central bank failure, recession and
It requires trust in the performance of the central institution
An external audit is required to verify the accounts
These types of stablecoins are backed by other digital currencies, which are usually cryptocurrencies with huge market capitalization such as Bitcoin (BTC) or Ethereum(ETH). Typically, these types of stablecoins are backed by a combination of digital currencies rather than just one currency. This feature allows for better risk distribution; Because the risk of oscillation of a particular cryptocurrency is much higher than the risk of a combination of cryptocurrencies. In addition, a stablecoin backed by a particular digital currency does not make much sense because cryptocurrencies fluctuate sharply and cannot be considered a good value store.
Pros of crypto-collateralized stablecoins:
Its liquidity, or the ability to convert from one cryptocurrency to another, occurs quickly through the blockchain.
Transparency: Each transaction is recorded in the public blockchain and provides full transparency and tracking capability.
No need for an external account to control transactions
Cons of crypto-collateralized stablecoins:
Fluctuation: Because the assets that support this type of stable coin are cryptocurrencies, these currencies are inherently much more volatile than other assets such as commodities or physical money.
Instant liquidation: If the value of cryptocurrencies falls below a certain threshold, this support can be dissolved instantly.
These types of stable coins are the only categories that do not use any assets as collateral and function like the central bank system. In fact, it uses an agreement mechanism to increase or decrease the supply of tokens, which is similar to the process of printing banknotes from central banks. As aggregate demand increases, a new supply of stable coins is created to bring prices back to previous stable levels. The main goal is to bring the price of StableCoin as close to $ 1 as possible.
The list of benefits of non-collateralized stablecoins is very long, so in order to only name a few, we can mention:
Decentralized: Since any corrections are made to the chain, all data on stable coins is stored in a secure and transparent general ledger.
No need for collateral: No collateral is needed to create new stable coins. Because they are created or destroyed by an algorithm, and the only way StableCoin can be obtained is through exchange.
Stable: Because prices are automatically adjusted based on market supply and demand, prices remain stable.
A disadvantage of the non-collateralized stablecoins is their complexity, i.e, a law-based system is associated with complex logic.
The most famous stablecoins in 2020
Stable coins are growing day by day and new samples are being offered every day. Here's a condensed list of some of the most famous ones right now.
Tether (USDT) is a fiat collateralized stablecoin that is pegged to the US dollar, and has remained relatively stable since its introduction in 2015.
True USD (TUSD) is a fiat collateralized stablecoin which attempts to address the criticism directed at Tether.
Paxos Standard (PAX)
USD Coin (USDC) is a fiat collateralized stablecoin issued by Circle and Coinbase.
Binance USD (BUSD)
Gemini USD (GUSD) is a fiat collateralized stablecoin issued by the popular crypto exchange Gemini which was established by the Winklevoss brothers. According to Gemini, GUSD is the first regulated stablecoin in the world.
Dai (DAI) is a stablecoin created by MakerDAO which is crypto-collateralized
How to work with stablecoins?
Each stablecoin has its own operating system, but in the end, all of them follow a the same structure. In most cases, these coins maintain their 1: 1 value in dollars, so in the face of severe fluctuations in other cryptocurrencies and commodities, the mechanism of these stablecoins can be used. Supply and demand are controlled under a special mechanism in these coins. In this way, it does not allow the market to have high accumulated demand and high supply, and in this way, it controls their prices.
How to make money with the help of stablecoins?
The methods of earning money from stablecoins are similar to cryptocurrencies (mining). The first way to do this is to buy and sell them directly in global markets and on trading platforms. Through the fluctuations created, users can earn money in this currency. Of course, due to the low volatility of these currencies and the stability of their prices, you should look at your long-term vision. The second most popular way to earn money through stable coins is to extract them. In addition, you can also earn money by lending in the system of any stablecoin.
If you want to see a stablecoin "in action", check out our project dock - we have a proposal for a stablecoin project waiting to be tokenized!