Today, there are 180 currencies globally recognized by the United Nations, from the US dollar to the European pound to the Japanese yen, and more.
We all know the thrill of collecting different cryptocurrencies but have you heard about the Stablecoins.
They are digital currencies that are used to transact on distributed ledgers called blockchains.
Stablecoin in cryptocurrency is a token whose value is related to the price of the national currency in order to counteract its instability.
There are several types of stablecoins and various alternatives and specific ventures that give the same basic idea of a cryptocurrency coin that has more stability than Bitcoin or altcoins.
Unlike other cryptocurrencies such as bitcoin, which are highly volatile, stablecoins provide users with realistic, beneficial advantages of cryptocurrency without bothering about distressing price changes as they are rooted in the real world.
What are the basic principles of a cryptocurrency?
- Decentralized: With a Decentralised blockchain platform no single person or entity controls a cryptocurrency.
- Consensus-controlled supply: Decentralized implies that the supply of cryptocurrency is either decided by an agreement between users of cryptocurrency or by a predetermined set of rules on how new coins are promoted, such as mining.
- Price stability: Have a stable price to make them affordable to use in their daily lives and to reduce the risk associated with them. Scalability should help to reduce price volatility.
- Fast, limitless transactions: Cryptocurrency can be sent to anybody, anywhere and at any time, without using a third party such as a bank. It uses a decentralized Internet-based network at a minimum or zero cost.
- Transparency: The architecture and technical aspects of the cryptocurrency and blockchain that it runs are open to all, and all transactions are documented in the public account that all other users can access and check.
- Privacy & Scalability: While all transactions are registered, the identities of all users remain anonymous. Public keys are used by all parties involved in the transaction, with the sender and receiver known by the unique number of each and every public key.
What are the different types of stablecoins in the cryptocurrency market?
Cryptocurrencies are lauded for paving the way for decentralized, peer-to-peer tendering methods and blockchain-based currencies that promise to take electronic money to the next level.
Fiat-backed stablecoin coins are fully backed by fiat money. Fiat-backed stablecoins are backed by 1:1, meaning $1 of stablecoins is equal to $1 of fiat money.
The premise is that their stablecoin is’ backed’ by real fiat in real bank accounts, and this type of stablecoins is the simplest, but also the most centralized.
Fiat-collateralized stablecoins are the simplest structure that the stablecoin can have, and simplicity has great advantages. It’s easy for anyone new to cryptocurrencies to understand, which can make it easier for them to follow it more broadly.
Simple: The fiat-backed structure is easy to understand and transparent.
Stability: Fiat currencies are a reliable commodity because they are (legally) backed by the government and the economy of the country. It means that the underlying values do not fluctuate much.
Just as a fiat-collateralized stablecoin has a fiat tender as collateral, a crypto-collateralized stablecoin has cryptocurrencies locked up as collateral, such as Ethereum.
In order to compensate for the instability of the protected cryptocurrency, the stablecoin is required to make a protection commitment.
This means that the coin will not have a ratio of 1:1 to the collateral crypt; it will look more like a promise of $2 USD for every $1 USD of stablecoin released.
The cryptocurrency or digital currency basket is used to hold this sort of Stablecoins. The use of central depositories, such as banks, is excluded in this situation. This method also aims to maintain price stability for decentralized tokens.
And in this system, the stablecoin is overly secured by a pledge to absorb any price fluctuations of the cryptocurrency.
- There is no need to rely on a third party that provides collateral storage.
- A higher degree of decentralization
- Blockchain transactions make it possible to manage the supply of Stablecoins faster
- The higher level of liquidity than fiat stablecoins
Seigniorage Shares is a cryptocurrency concept that corresponds to a fiat that does not require collateral in other assets.
Non-collateralized stablecoins use the Seigniorage Shares scheme. Essentially, tokens depend on a mechanically-generated algorithm that is able to change the amount of supply if necessary in order to maintain the price of the token attached to the asset.
Non-collateralized stablecoins rely on smart contracts to sell tokens if the price falls below the peg or to exchange tokens if the value increases. In this way, the token will remain stable and keep its marker.
The commodity to which the stablecoin is attached could be fiat currency, such as the US dollar, or a real asset like gold.
- No need for collateral
- A higher degree of decentralization and freedom, since no fiat currency or crypto active assets, are binding.
What are the top stablecoins are present in the cryptocurrency market?
Here are some of the top StableCoin that have brought transformation to the world of cryptocurrency:-
Tether is a cryptocurrency with a value that represents the value of the US dollar. The idea was to create a secure cryptocurrency that could be used as digital dollars.
Coins that fulfill this function of being a stable dollar substitute are called “stable coins.” Tether is the most common stable coin and even serves as a dollar replacement for many major exchanges.
Tether is supposed to be backed by dollars which are kept in reserve at 1:1 ratio, ideally, this means that Tether trades at $1 on all exchanges and can be used instead of a dollar. In fact, however, costs tend to fluctuate somewhat.
The primary use of Tether is that it offers some stability to the otherwise volatile crypto area and provides liquidity to exchanges that can not deal in dollars and with banks
Dai is a decentralized cryptocurrency that is designed around Ethereum, a much larger cryptocurrency that focuses on smart contracts to make it stand out from other top cryptos including bitcoin.
Ethereum is used as leverage to support Dai’s interest. The Ethereum is a smart contract, which ensures that there is no need for a central authority to keep it on behalf of users.
However, Dai is not free from any problems. It may be decentralized, but the underlying asset that gives Dai its value is nowhere near as robust as the dollar’s fiat currencies.
Dai wins points for being decentralized, but the base on which it is founded – the thing that brings stability to this stablecoin – is not itself free from volatility.
His destiny is in the hands of Ethereum. The maker of Dai, MakerDAO, is also responsible for the cryptocurrency of Maker.
BaseCoin is a cryptocurrency whose tokens can be linked to specific assets of products while remaining absolutely decentralized. In response to changes in the exchange rate, their protocol algorithmically updates the supply of BaseCoin tokens.
The application of monetary policy is like the central banks around the world that have limited the supply of money by expansion.
BaseCoin is designed to create a scalable cryptocurrency that is decentralized and price-stable based on an algorithmic blockchain protocol.
It aims to implement an algorithmic central bank that ensures stable prices and supplies of BaseCoin tokens through its decentralized, protocol-enforced algorithm.
As we discussed, stablecoins provides an entrance toward a new financial system through this stable on-ramp into blockchain systems.
Decentralized stablecoin can maintain a fast and accurate exchange rate with its underlying asset without a third-party exchange of any kind, and although they are built to be stable, there are still some sectors that need to be improved through which they can manage heavy price fluctuations.