Stablecoins: Who are they?

Have you ever heard of a Tether, USD Coin, DAI, AMPL, or other asset that claims to have a target price? Most likely yes, but if not, this article will help you understand how tokens that offer the ability to accept cryptocurrency work without worrying about market volatility.

Stablecoin as an attempt to curb volatility

With long-term use of Bitcoin, if you are an owner or a hodler, you know that its price will be much higher, so this is not a problem for you. But for people who are looking for an asset for everyday use with a relatively stable value, this won’t work. Therefore, stablecoins are intended for this purpose. Stable coins make it possible to accept cryptocurrency without worrying about market volatility.

Types of Stablecoins

  • Centralized Stablecoins are linked to FIAT

FIAT is a currency issued by governments that people mostly use every day, such as the ruble, US dollar, euro, pound sterling. These FIAT currencies are centralized, managed by central organizations, and generally remain relatively stable.

For centralized stable coins, a relatively stable price is achieved by linking assets to these fiat currencies. For this purpose, the central organization that manages the binding collects or creates reserve stocks that serve as collateral and a guarantee of return, and supports stablecoins. The ultimate goal is to ensure that the value of stablecoins is equal to the value of the fiat assets that support them.

Tether (USDT)

This stablecoin claims that its coin is 100% backed by reserve reserves.

“Every Tether coin is always 100% backed by our reserves, which include traditional currency and cash equivalents. Each Tether is also pegged to the dollar 1 to 1, so the 1 USDT token is always valued at 1 US dollar”, — Tether’s official website

USDT is mainly used on exchanges as a bridge between fiat currency and cryptocurrency, but is also issued on several networks, such as Ethereum as an ERC-20 token, Tron as TRC-20, EOS, and others.

USD Coin (USDC)

The developers of this asset claim that each of the USDC is backed by 1 dollar (USD), and the reserve reserves are in bank accounts.

“The USDC is issued by regulated financial institutions, supported by fully reserved assets, redeemed at a 1: 1 ratio for US dollars, and managed centrally by a membership — based consortium that sets the technical, policy, and financial standards for stablecoins.” — the official website of USD Coin

This crypto asset is also issued on the Ethereum blockchain as an ERC-20 token.

  • Decentralized stablecoins linked to cryptocurrency

These stablecoins do not have central organizations managing the assets, but are managed by users participating in the networks, who have weight in voting according to the percentage of the management tokens they hold.

In most cases, when buying / borrowing decentralized stablecoins, a certain amount of other crypto assets, which are reserve reserves, is required as collateral.

Dai (DAI)

Moreover, DAI is regulated by MKR token holders. These holders form a decentralized community in which management is carried out according to the percentage of tokens owned by the participants. This management is a gateway that allows changes to be made to the network, with voting rights according to the number of MKR tokens, to manage the risks and market logic of the Maker system, for example, as a stability fee or what type of assets to allow as collateral.

  • Decentralized coins based on the algorithm

This type of crypto asset tries to look as much like a stablecoin as possible, but cannot be considered such a term due to the volatility. These assets rely on an algorithm to remain as stable as possible near their target price, and are not dependent on centralized collateral or lenders due to the use of an elastic supply mechanism.

For example, one way is to change the percentage of token supply by burning or creating coins according to the volume of the market, so that the value of the assets approaches the final target price. Indeed, when the value of assets falls below the target price, the algorithm burns a percentage of the coin supply, which leads to a shortage of them, so that the asset price rises again to the target price. On the other hand, when the asset value exceeds the target price, the algorithm creates a percentage of the coin supply to lower the price to reach the target price again. All this in order to get closer to the final target price. For example, Ampleforth AMPL uses this method.

Ampleforth (AMPL)

However, you should be careful with the volatility of the AMPL token market. Indeed, AMPL provides the same function as stablecoins, as it is close to the target price of $ 1.033, but does not eliminate the volatility.

The Ampleforth team highlighted on their website the reasons why:

“We are often asked “If the number of tokens in my wallet can change, then isn’t AMPL still speculative and unstable? Why not use stablecoins like Tether or DAI to denote contracts?” Our response: “Because the goal of the movement for decentralized finance is to create an alternative financial ecosystem that is inaccessible to politics”.

Today, stablecoins rely on either traditional banks or lenders of last resort. AMPL is an independent financial primitive that does not rely on centralized collateral or lenders of last resort. This is similar to Bitcoin, except that it can be used in contracts.” — AMPL official website

Last thoughts

Although stablecoins tend to have no volatility, and try to be as stable as possible to achieve the goal, we could say that they are just as stable / volatile as the asset they are linked to / linked to. In fact, any fluctuations in the value of fiat will affect the value of stablecoins.

Source: https://decimal.news/stablecoins-who-are-they/

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