Stablecoins Or Cryptocurrencies With Stable Trends
All users that are familiar with cryptocurrencies know about their drawbacks as a form of payment. They are considered highly volatile with extremely unstable trends. In practice, this means that within the span of a few days or hours you can lose upwards of 50% of your investment funds. This fact makes it difficult for even online currency exchangers to use cryptocurrencies as transitional currencies.
That being said, there is a project aimed at resolving this problem, stablecoin. This article will examine this question.
What are stablecoins?
Stablecoins are a new type of cryptocurrency that have fixed volatility. To put it simply, stablecoins are stable cryptocurrencies whose rates don’t change rapidly but retain, for the most part, one value for extended periods of time. This makes it possible to use them as a normal method of payment to buy goods, pay for services, or even as a currency for incomes and pensions.
There are also international projects to introduce such payment systems.
Another difference of a stablecoin is that their value is effectively ensured. For example, this role can be fulfilled either by national currencies, or other valuable assets such as oil, precious stones, or metals. Practically any asset can serve as collateral. The primary requirement is its liquidity. If we were to classify them in terms of their collateral, there would currently be 3 types of stablecoins, fiat, crypto, and non. In the first case, fiat currencies are used as collateral, in the second, cryptocurrencies, and in the third, there is no collateral.
The presence of collateral at all contradicts the principles of Bitcoin, which is open about that fact that the cryptocurrency will have absolutely no collateral. Some analysts consider it to be an advantage. However, it is already clear that as a result of this trends are extremely volatile. This fact alone discourages most companies from seriously integrating cryptocurrencies as a payment system.
Categories of stablecoins by type of collateral
As we have previously pointed out, there are three types of stablecoins, fiat, crypto, and non. We will consider all of them in further detail.
Fiat-collateralized. Fiat currencies are widely used in the financial world as a form of collateral. In practice, it resembles the following picture. Every stablecoin provides written acknowledgment of the collateral provided, including the specific amount in whichever currency (dollars or euros for example). To put it simply, a fixed amount of fiat currency is taken as collateral, the total of which must be equivalent to the number of stablecoins in circulation. To understand this better, take the following example. Let’s say 1 stablecoin is equal to $1 USD. To buy it, the user will need to pay $1 dollar. They can also exchange their 1 stablecoin back at any time for $1 dollar.
The particularities of fiat-backed stablecoins:
- Audits must be conducted on a regular basis to verify that the total amount of collateral is correct in relation to the amount of the cryptocurrency in circulation. Ensure it isn’t a “financial bubble”.
- Check if it is centralized because real collateral is held with third parties. It increases the level of risk investors take on.
- Check if it is strictly regulated by governmental bodies. Deeply integrating a cryptocurrency into the live economy requires strict adherence to legal norms and rules.
Crypto-collateralized. This type of collateral is similar to the one above, although it uses another cryptocurrency as collateral, such as Bitcoin, Ethereum, Ripple, Litecoin, or any other. The advantage of this approach is that it is independent and decentralized. However, unlike fiat-collateralized stablecoins, these have less stable trends. Market capitalization changes relating to the collateral cryptocurrency appear as stablecoin trend fluctuation, although much less pronounced.
Non-collateralized. Stablecoins without any real collateral. Unlike normal cryptocurrencies, these undertake methods to support trend stability through seigniorage. However, this approach requires steady growth and releasing more of the crypto-coin into circulation. If the opposite is true, the trend can’t remain fixed. The potential for unstable volatility is the primary drawback of non-collateralized stablecoins. Hence, their perspectives for growth are seriously in doubt in comparison to the first two types.
Stablecoins are an interesting project that has potential without a doubt as it aims to resolve one of the leading problems of modern cryptocurrencies. That being said, currently, its potential hasn’t been realized to a great extent. It is possible that in the near future stablecoins will see significant growth. In conclusion, it is worth emphasizing that stablecoins are not cryptocurrencies like Bitcoin or Ethereum, but a completely new approach for developing specific solutions.