Stable Coins
Bitcoin is undoubtedly the most popular and highly capped cryptocurrency in the current situation, with a market share of $701.35B as of February 2021.
Whilst being so popular and the highest market cap procurer, it is highly volatile in its valuation. It valued at around $29,927 by 22, January 2021 and rose extensively within a week to $36,914 on 29, January 2021. However, it depreciated again by $4000 on 1, February 2021 and currently is valued at $37,601 as of 6, February 2021. Due to such instability in valuation, these cryptocurrencies are not viable for everyday use such as buying and selling of goods or paying for services.
To overcome such value instability of these cryptocurrencies, we have a new segment of cryptocurrency which is entirely the opposite of normal cryptocurrencies that is ‘Stablecoins’.
What are Stablecoins
By being indexed to an asset or reserve commodity such as the US dollar, gold, or some other international currency, Stablecoin aims to maintain market stability. The value of stablecoins is not decided by the market or the algorithm but by their underlying asset. Some people might question the need for such a cryptocurrency after all it is just a digital money. However, Stablecoins are much different. Even though they are pegged to an asset, it is just for the value. The actual purpose of making fast and efficient transactions without the intervention of a third party is the end goal and stable coins have enabled a wider adoption of cryptocurrencies by being that medium in the new world
In a way, Stablecoins offer both the security of crypto transactions and the stability of regular currency. To broadly categorize Stablecoins, we have three prominent types that are mentioned below:
● Fiat-collateralized stablecoins — These kind of stablecoins use a reserve fiat currency as collateral, such as the US dollar, gold, silver, oil, and other reserves, to issue a sufficient volume of crypto coins. Usually, these funds are retained and subject to compliance examination by impartial custodians. Amongst others, cryptocurrencies such as Tether, TrueUSD, and USDC are equivalent in worth to one US dollar and are backed by deposits of dollars.
● Algorithmic stablecoins — These kind of stablecoins are neither collateralized nor they have a reserve asset. They aim to mimic the manner in which the banks operate in countries. They try to withhold the currency of the country by printing an appropriate number of banknotes, Same as central banks in countries try to hold the currency of the nation at a stable price by printing a sufficient number of banknotes. For instance, some stablecoins that are pegged to the US dollar use a consensus mechanism to minimize or raise cryptocurrency supply on the basis of the need to retain a stable price.
● Crypto-collateralized stablecoins — Stablecoins that are crypto-collateralized are linked to other cryptocurrencies such as bitcoin or ether. As the cryptocurrency reserve can still be vulnerable to extreme volatility that stablecoins aim to prevent, these stablecoins are over-collateralized, meaning that a greater amount of deposits of cryptocurrency are held to release a comparatively limited number of stablecoins.
Summing up
Stablecoins serve a far broader function than making financial contracts or being a transparent and semi-stable way for traders to exchange. We are witnessing the evolution of money and the financial system of the world. It is the new capital, in the absence of any political stimulus, that will be managed algorithmically. It will actually help to make use of being a sophisticated transaction tool and as an account unit that we have in human experience.
