The Crypto world has introduced many new concepts to society, but perhaps the most comprehensible to a mainstream audience is that of a digital stablecoin. Today, we analyze what a stablecoin is, and how it works.
WHAT IS A STABLECOIN?
A stablecoin, as the name implies, is a replica of a stable asset on the Blockchain, to combat the volatility of cryptocurrencies while still mantaining the possibility of storing your value in a decentralized manner, with the additional benefits of factors like staking and liquidity providing. Stablecoins are backed by real world assets, often tied to entities such as the State, of which the value is reproduced with a 1:1 ratio. Supply mechanics are obviously tied, or pegged, to the asset the stablecoin reflects. While possibilities are almost endless, the most common type of stablecoins are the two below:
Coins pegged to FIAT currencies are the most common and used on the crypto market. Examples are US Dollar Tether (USDT), Binance US Dollar (BUSD), and USD Coin (USDC). These products, if executed correctly, exactly follow FIAT Currency's value in a decentralized manner, and are very secure. Problems arise when the stablecoin isn't tied exactly to its real world currency and presents pegging issues; this was the case with UST (the Terra Dollar), which stooped as low as 26 cents on the dollar after a massive selloff in which their burning and minting algorithm based system couldn't handle it.
Another option is a commodity backed stablecoin, such as XAUT (Tether Gold). They are backed by common store of value assets such as Gold, and are often backed by physical amounts of, in this case, gold. There are also silver or copper backed stablecoins. An advantage of these "Commodity cryptos" is portability; while still backed by physical counterparts, A gold backed stablecoin can be divided in many small fraction and transported easily, while actual gold is difficult to find in the lower price ranges and to transport. In conclusion, stablecoins offer a great way to avoid centralized entities and the crypto space volatility at the same time; though you must DYOR to avoid projects that might not be structured correctly, they are one of the reasons why the blockchain space is very popular.
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