Significance of Stablecoins in our Society
Today the post will revolve around analysis and the significance of stablecoins in the blockchain and cryptocurrency industry. I will be defining each form of stablecoin, the most popular stablecoins currently in the industry, and how stablecoins influence the adoption of virtual currency in society.
---Disclaimer: I am not giving investment advice, I am only making you aware of the recent news regarding cryptocurrency so you can better understand the coin, technology, and the overall effect cryptocurrencies are currently having in the world we live in.---
Question: "What are stablecoins?"
Answer: Stablecoins are a form of cryptocurrency that links the coin's market value to an external reference.
An example of an external reference to an asset in our society can be when the United States Dollar (USD) value came from gold. Unlike the USD, stablecoins consistently link to external assets. The United States discontinued the gold standard nearly 90 years ago (June 5th, 1933).
The most well-known stablecoins in the market currently are Tether (USDT), True USD (TUSD), Pazos Standard (PAX), USD Coin (USD), Carbon (CUSD), and Dai (DAI).
Question: "Why are there so many variations of a stablecoin? What are the differences, if any?
Answer: The differences of each stablecoin form from the collateralization in which each stablecoin is processed. The different types of stablecoins are fiat-collateralized stablecoins, crypto-collateralized stablecoins, and non-collateralized stablecoins. Though each seems self-explanatory, let us dive into each of the three categories.
- Fiat-collateralized stablecoins are cryptocurrencies backed by fiat currencies. Fiat currency examples are the United States Dollar, Mexican Peso, Chinese Yuan, and the Euro. Examples of stablecoins that are fiat-backed are Tether and USD Coin.
- Crypto-collateralized stablecoins are cryptocurrencies backed by other cryptocurrencies. Here, the stablecoins require the user to stake their cryptocurrency into smart contracts. An oversimplification of a smart contract would be an agreement between two or more individuals transacting digital assets. An example of crypto-backed stablecoins is Dai.
The advantage of crypto-backed stablecoins is the decentralization and the efficiency in which the transaction is completed. On the other hand, the disadvantages of using crypto-collateralized stable coins are the volatility of the backed cryptocurrencies. Crypto-based stablecoins attempt to limit the volatility by backing their value off of multiple cryptocurrency assets. Not just one single cryptocurrency.
Finally, let's discuss non-collateralized stablecoins. These stablecoins are not backed by anything mentioned above in the previous two forms of stablecoins. The number of smart contracts dictates the supply. This stablecoin can increase or decrease volume depending on the number of stablecoins transacted through the said smart contracts. An example of a non-collateralized stablecoin is Carbon.
The most well-known stablecoins currently are ones I had given examples for in each of the three different forms of collateralization. First, we will dig into the fiat-based cryptocurrencies Tether and USD Coin.
Tether was the first of its kind regarding stablecoins. You can call it the "Bitcoin of stablecoins." Tether aims to be at a constant value concerning the United States Dollar. So, if you have $5 on you and you wish to own the fiat-backed cryptocurrency, you will have 5 Tether coins! Tether and other fiat-backed cryptocurrencies are significant assets in the sense of liquidity. For example, you own Bitcoin, and you see an increase of 5% in your portfolio and want to ensure the gain, you can transfer your Bitcoin into Tether.
USD Coin performs in the same manner as Tether. Depending on your cryptocurrency wallet, holding the fiat-backed cryptocurrency can be a great way to grow your earnings on an annual basis. Both the USD Coin and Tether allow the stablecoin holder to earn an interest rate. The annual percentage yield (APY) for a stablecoin holder of Tether on Blockfi can see an APY of 9.3%! USD Coin holders will see an APY of 8.3% on Blockfi.
As for the crypto-collateralized cryptocurrencies, Dai is the most commonly used. Dai aims to be at a ratio of 1-1 with the United States Dollar. Dai is a crypto-backed currency that runs on the Ethereum blockchain by the ERC-20 token and is developed by Maker Protocol (MKR).
Question: What is Maker, and how is Dai a part of Maker's Protocol?
Answer: Maker is a "Decentralized Autonomous Organization" (DAO). Maker aims to create a trusted line of stablecoins backed by various assets (Gold, Oil, and other forms of fiat currencies). Maker has been developing this asset process even before the development of Ethereum.
Last but not least, the non-collateralized stablecoin section. Carbon falls under this section because fiat currencies or other cryptocurrencies do not back it. Carbon is a non-collateralized cryptocurrency. Just as Tether and Dai, Carbon tries to stabilize the price of one CUSD to $1.00. Carbon uses an economic-based computer algorithm module to ensure the ratio is constant at 1:1. If the price of one CUSD falls below or exceeds $1.00, the algorithm either increases or decreases supply regulations. The algorithm Carbon uses is named "Hedra Hashgraph"
Stablecoins can show a leap forward into the acceptance of the digitalized currency. For instance, if you or someone you know are unsure of investing in cryptocurrencies such as Bitcoin because of the volatility, stablecoins are an effective alternative for users just now entering the crypto-verse. Stablecoin holders can receive an annual percentage increase for staking their assets. Staking your stablecoins is the same protocol as holding your money in a bank.
Though the United States government does not see any of these stablecoins as digital forms of the United States Dollar, the popularity of stablecoins is sure to increase. With the popularity of the digital asset industry increasing, various payment systems start to accept fiat-backed, crypto-backed, or algorithm-backed stable coins as suitable alternatives.
Until next time,
Seth Hinkle
Websites used for Information:
Anty, Karol. “Carbon Review: Hashgraph Stable Cryptocurrency Payment Money?” BitcoinExchangeGuide, bitcoinexchangeguide.com/carbon/#:~:text=Carbon%20is%20a%20trustless%20stable%20cryptocurrency%20designed%20to,or%20upward%20with%20inflationary%20or%20contractionary%20supply%20policy.
“Dai.” Cryptonews, cryptonews.com/coins/dai/.
Frankenfield, Jake. “Tether (USDT).” Investopedia, Investopedia, 21 Apr. 2021, www.investopedia.com/terms/t/tether-usdt.asp#:~:text=%20Key%20Takeaways%20%201%20Tether%20%28USDT%29%20is,hiding%20an%20%24850%20million%20loss.%202%20More%20.
Sam, Alyze. “Crypto-Collateralized StableCoins with 2019 Complete Guide!” Medium, Cryptocurrency Hub, 25 Mar. 2019, cryptocurrencyhub.io/crypto-collateralized-stablecoins-w-complete-guide-74e261f34b1b.
Team, CoinMetro. “What Is a Stablecoin and Why Are There So Many Now?” CoinMetro Blog - Crypto Exchange News, 29 June 2020, coinmetro.com/blog/what-is-a-stablecoin-and-why-are-there-so-many-now/.
Picture used:
https://www.publish0x.com/dalz-blog/stable-coins-is-tether-losing-against-usdc-and-dai-xxwvzvj