Understanding the stablecoin
Let’s first define stablecoins using the current jargon. Stablecoin – a subcategory of cryptocurrency that differs by attempting to offer a more stable price and are backed by a reverse asset. A reverse asset is any financial asset denominated in foreign currency and held by central banks, primarily used to balance payments. Even the proper definition of stablecoins leaves much to be desired. You know when a definition relies on another word’s definition then the explanation, especially for newcomers, is lost almost entirely. However, the gist is that stablecoins are cryptocurrencies that are backed by foreign currencies held by central banks. With the hopes that the cryptocurrency stablecoins will ebb and flow with the market alongside their foreign currency counterpart. It also has some benefits such as instant processing and the security and/or privacy granted by making transactions on the blockchain.
Why would we need and/or want stablecoins?
Firstly, stablecoins are NOT the same thing as fiat currencies. Just because they are backed by currencies held by central banks does not mean that they are in control of their transactions, they are not. Transactions still take place on the blockchain in true decentralized fashion. However, a more reasonable explanation is volatility. When we hear or talk about cryptocurrency the one word that should come to your mind most quickly is volatility. Let’s use Bitcoin as an example. From March 2020 to April 2021 Bitcoin saw a price increase from ~$5,000 to ~$65,000, then just a few short months later in June 2021 it crashed to ~$30,000. For some, this is just too much risk for them to handle. They would not normally be so keen on such risk. Whereas they might be more likely to enter the crypto space through stablecoins. Since these coins are back by fiat currencies they can be (somewhat as) trustworthy as their supporting asset. Therefore, drastically reducing one’s risk entering into crypto. Stablecoins can be broken down into three subcategories: Fiat-collateralized, crypto-collateralized, and non-collateralized.
Fiat/Commodities-collateralized stablecoins is a type of cryptocurrency that is backed by a fiat currency or a commodities reserve, such as the USD or gold. The USD has two popular crypto coins that retain the value of roughly one USD. Those tokens are Tether and TrueUSD, these tokens are backed by USD reserves that are regularly audited to make sure that they are adhering to the strict guidelines for compliance. Crypto-collateralized stablecoins are quite similar to fiat-collateralized stablecoins, expect that they are backed by other cryptocurrency reserves. However, due to cryptocurrency volatility, in order to get these tokens to fit the more stable nature of stablecoins, they must be over-collateralized. Meaning that more value in the supporting asset is kept in reserves so that in times of volatile market swings the stablecoins may remain relatively constant. Lastly, we have non-collateralized stablecoins. These tokens are not backed by any reserve, as their name suggests. They instead include an algorithm to preserve the token’s stability. An example of this type of stablecoin is a dollar-pegged token called basecoin. Basecoin uses an algorithm that increases and/or decreases the supply of tokens on an as needed basis.
Do you need to buy stablecoins or are you better off just keeping your fiat?
You can use stablecoins in a few different ways. Foremost, you can use them as a payment method, they can also be used as a hideaway from volatility in the crypto space, and as a way to transfer value.
The pros:
Stablecoins are safe from most extreme crypto market volatility
They are a way to securely and privately transfer value
They can be processed instantly
The cons:
They ebb and flow with their supporting currency, so you are better off keeping the supporting currency instead of adding the risk of the crypto market into the equation
They will not appreciate to any meaningful extent.
If you are wanting to get into the crypto market but are unsure how you will handle the volatility, then I would suggest buying a fiat-collateralized stablecoin and holding it in your wallet. Once you get the hang of how the processes work then you can easily transfer your fiat-collateralized tokens with a more traditional, volatility ridden, token like Bitcoin, Ethereum, Solana, or others.
References:
Brandon. “How the Bitcoin Cash (BCH) Hash War Is Affecting Bitcoin (BTC).” BLOKFORGE, BLOKFORGE, 17 Nov. 2018, blokforge.com/2018/11/16/how-the-bitcoin-cash-bch-hash-war-is-affecting-bitcoin-btc/.
Frankenfield, Jake. “What Is Basecoin?” Investopedia, Investopedia, 8 Feb. 2022, www.investopedia.com/terms/b/basecoin.asp.
Hayes, Adam. “What Is Stablecoin?” Investopedia, Investopedia, 8 Feb. 2022, www.investopedia.com/terms/s/stablecoin.asp.
Hertig, Alyssa. “What Is a Stablecoin?” CoinDesk Latest Headlines RSS, CoinDesk, 14 Oct. 2021, www.coindesk.com/learn/what-is-a-stablecoin/.
Mitchell, Cory. “Reserve Assets Definition.” Investopedia, Investopedia, 21 Sept. 2021, www.investopedia.com/terms/r/reserve-assets.asp.
Ram, Simona. “What Are Stablecoins and Why Should You Care about Them? - Dailycoin.” DailyCoin.com, 5 Jan. 2022, dailycoin.com/what-are-stablecoins/#:~:text=1%20Stablecoins%20are%20digital%20currencies%20with%20a%20stable,can%20be%20used%20to%20earn%20interest%20and%20stake.
“Tether Price Today, USDT to USD Live, Marketcap and Chart.” CoinMarketCap, coinmarketcap.com/currencies/tether/.
“TrueUSD Price Today, TUSD to USD Live, Marketcap and Chart.” CoinMarketCap, coinmarketcap.com/currencies/trueusd/.
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