What should we know about stablecoins?

拔丝地瓜

特邀专栏作者

2020-10-26 09:00 (UTC+8)

This article is about 2745 words, reading the full article takes about 4 minutes

Basically, a stablecoin is a currency whose value is tied to an asset such as currency, gold or oil.

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Basically, a stablecoin is a currency whose value is tied to an asset such as currency, gold or oil.

Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Crypto Valley Live (ID: cryptovalley)

, Author: Techfry, Translation: Olivia, reproduced by Odaily with authorization.

In this article, we will cover some important things about stablecoins and understand their impact on the economy.

What are stablecoins?

Basically, a stablecoin is a currency whose value is tied to an asset such as currency, gold or oil. The birth of stable currency is to provide everyone with a currency experience. It can be conveniently used in our daily life, such as buying ice cream, pizza, etc.

If we compare stablecoins with other cryptocurrencies, if other cryptocurrencies are roller coasters, then stablecoins are equivalent to toy trains.

In fact, some stablecoins are generated by fiat currency collateral. So when some stablecoins enter circulation, the same amount of fiat currency will be deposited somewhere in the bank.

Stablecoins are digital fiat currencies created on blockchain technology, so let’s take a deeper look at stablecoins.

The History of Stablecoins

If you thought that the concept of a stable digital currency was new, then you would be wrong, because the idea of a stable digital currency is actually quite "old".

In 1996, Gold & Silver Reserve Inc. launched E-gold. It used to denominate users' accounts in grams of gold so that one user could easily transfer currency to other users, but it ceased operations after a while due to legal issues.

In 2006, they re-created a stable coin service in Costa Rica called Liberty Reserve. There, users simply provide their name, email address and date of birth to create an account and transfer money. The Liberty Reserve USD and Liberty Reserve EUR are pegged to the U.S. dollar and the euro respectively, but the companies were shut down by the U.S. government in a 2013 money laundering case.

We don’t currently have data on how many stablecoins have been launched and shut down in the past, but the situation for stablecoins today is much better than it used to be.

What can stablecoins be used for?

Stablecoins have individual and institutional use cases respectively, and I will introduce some comprehensive use cases below.

1. Daily purchase and payment

Since stablecoins are suitable currency alternatives, they can easily replace dollars, euros, or your local currency. Therefore, there is no need to carry cash and cards in future transactions, and we can directly use stable coins to pay employees' salaries, so stable coins have the ability to change the way we use money.

2. Cross-border transfer

In 2018, the research found that $689 million in funds moved across borders, and this series of transactions was mainly generated by miners. This is due to the fact that the payment gateways they use are slow and consist of high fees, so stablecoins would work well here. Because in the process of using stablecoins today, we can use lower transaction fees for instant cross-border remittances.

3. Stable trading assets

Retail and institutional traders have seen several benefits in using stablecoins. Because we know that the crypto market is very volatile, it takes a lot of time if you try to convert your cryptocurrency into currency, but stablecoins give us protection from market disturbances to maximize our profits.

Stablecoins give us the freedom to enter and exit the crypto market without the need to convert cryptocurrencies into currencies that may charge high fees.

4. Prevent fiat currency inflation

In fact, many countries are facing the problem of inflation, such as Venezuela. Because the appreciation or depreciation of the currency depends on many factors, but with stablecoin inflation the rules will not work. So we can use stablecoins to protect our currency from inflation.

Venezuelan inflation chart. Chart courtesy of Statista/IMF.

Types of Stablecoins

1. Asset-collateralized stablecoins

Asset-collateralized stablecoins are backed by other assets that help maintain their price, and you can redeem your holdings at any time.

Basically, asset-backed stablecoins are backed by three types of assets: 1. Fiat currencies, 2. Commodities, and 3. Cryptocurrencies, let’s take a look at each.

Fiat-collateralized stablecoins

Every coin is backed by a stablecoin, which means that if there are $1 million in stablecoins in circulation, then there should be $1 million in fiat currency kept somewhere. When you cash out a stablecoin, the amount you cash out is paid out of the reserve, and the stablecoin is destroyed.

Tether is the largest stablecoin and ranks third on coinmarketcap by market capitalization. But Bitfinex, the company behind Tether, revealed last year that only 74% of Tether is backed by cash and securities. This is what fiat-backed stablecoins are all about — trust in a central entity.

The biggest advantage of having a fiat backed stablecoin is that it is easy to understand and easy to use because people are very familiar with the fiat system. But the biggest downside of fiat-backed stablecoins is that these are created on top of centralized systems, meaning there is a single point of failure and trust issues as you don't know if they are holding fiat properly, regulatory oversight and efficiency issues .

Commodity-collateralized stablecoins

Commodity-collateralized stablecoins, backed by commodities such as gold, real estate, and oil.

It can give you some shares that can be purchased in bulk. Because in reality, you can't buy gold or oil in fractions, and you don't need to consider the security of storing gold, because it exists in digital form, so you can store it for a long time to fight against inflation.

But commodity-backed stablecoins have similar drawbacks to currency-backed stablecoins.

Stablecoins Collateralized by Encrypted Assets

The concept of crypto-backed stablecoins is interesting because these stablecoins are backed by cryptocurrencies, so it gives us a permissionless decentralized ecosystem.

Since everything is built on the blockchain there are no trust issues, which means you never face the issues you face with currencies and commodity-backed stablecoins. But cryptocurrency prices can fluctuate, and to absorb those price swings and mitigate risk, you could be overcollateralized, meaning you might be forced to deposit $150 in cryptocurrency to get $100 in stablecoins.

Unsecured Stablecoins

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Model, its algorithm and smart contracts to balance supply and demand, which means that when the demand for coins increases, more coins are produced, and conversely, when the demand decreases, it buys these coins in circulation.

text"In the end, the above-mentioned model failed, and the algorithm-stable currencies include Nubits, BitBay, etc., most of which either did not gain traction or were closed directly."Now Meter is creating a stablecoin called

A stablecoin that takes advantage of the profit-seeking behavior of miners as an alternative, and which is immune to many of the shortcomings of algorithmically stable coins.

These are by far the most decentralized stablecoins because most of the infrastructure is created on the blockchain and they don't require collateral, but it also has some disadvantages that algorithmic stablecoins depend on future continuous demand to be successful.

Hybrid Stablecoin

These coins combine the characteristics of more than one coin, which can attract some users and investors. But for another group of people, it may be difficult to understand and also need to be reviewed by regulators if they are involved in any securities-like issues.