Stablecoins QnA: What are Stablecoins?

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Nov 20, 2018 · 3 min read
Stablecoins QnA: What are Stablecoins?

Stablecoins have been there for quite sometime surfacing on the internet. It took around seven years for Bitcoin to reach $19k from around being nothing in 2010. But it was just mid-2018 when the prices again dip to $6,177 of Bitcoins trading value. And surprisingly, it even went below the same.

The whole scenario mentioned above explains the instability of Bitcoins, and how far they stand to become a substitute to fiat currencies. Cryptocurrencies are still facing the unstable market drops, and it cannot be predicted. Neither it can be used widely by business and masses, thanks to the government-led restrictions.

Cryptocurrencies are still very impractical to be used in everyday-transactions. Looking back, cryptocurrencies were meant to be used as a P2P (peer-to-peer) transactional currency, that is purely digital.

Looking at the present scenario, there are over 2000 cryptocurrencies. The problems still lie with practical usage which is present. Drawbacks like these have given rise to some new forms of cryptocurrency assets, titled “stablecoins”.

Stablecoins are developed keeping in mind the issues faced with cryptocurrencies today. They also allow to make more use in the real-world scenarios.

Stablecoin 101

Stablecoin more-or-less, a variant of cryptocurrency asset. The trading value of a stablecoin would always go at-par with the pegging value to a fiat currency. Due to a sort of tie with the GBP, USD and similarly valued real world asset, a stablecoin’s value is never bound to the cryptocurrency hype.

It would not be wrong to image a stablecoin to be some type of collateralized digital asset, and not a cryptocurrency. Every stablecoin maintains a value parity with the fiat counterpart, or the metal it is tied to. If X-entity owns 5,000 units of Tether, which is tied to the USD and it equals to owning $5,000 worth of assets.

Collateralization With Stablecoin

Every other stablecoins have different sort of backing collateral.

The primary three type of stablecoin collateralization consist of

  1. Fiat Collateralized Stablecoins
  2. Cryptocurrency Collateralized Stablecoins
  3. Uncollateralized Stablecoins

Fiat collateralized stablecoins, for eg., Tether, Stably & TrueUSD are mainly tied to fiat modes of currencies. Similarly, crypto-collateralized stablecoins are tied to cryptocurrencies, as the name suggests.

Talking about the uncollateralized stablecoins, they kind of gain values by the autonomous algorithms. These algorithms in returns track the supply and demand of the present stablecoins.

Stablecoins Vs. Crypto

Stablecoins are developed in order to serve some surge against the instability and price fluctuations of the present cryptocurrency. They merge the liberal aspect of cryptocurrencies and the transactional usability of fiat modes of currencies.

Stablecoins, in return are not the ones that are controls under any banking authority. Also, they are globally transactional.

The stability of a stablecoin is directly proportional to the stability of the real-world asset, it is tied to. Hence the name consists — ‘stable‘.

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