After Bitcoin, many cryptocurrencies have been launched. You can see thousands of cryptocurrencies listed on coinmarketcap. In fact, most currencies are highly volatile. This feature makes them very suitable for investment, but for daily use, stable currencies play a more significant role.
In this article, we will introduce some important things about stablecoins and understand its impact on the economy.
What is a stable currency?
Fundamentally, a stable currency refers to a currency whose value is linked to assets such as currency, gold or oil. Stablecoins were born to provide everyone with a currency experience. It can be conveniently used in our daily lives, such as buying ice cream and pizza.
If we compare stablecoins with other cryptocurrencies, if other cryptocurrencies are roller coasters, then stablecoins are equivalent to toy trains.
In fact, some stable coins are generated by legal currency collateral. So when some stable coins enter the circulation field, the same amount of legal currency will be deposited in a bank somewhere.
Stable currency is a digital legal currency created on blockchain technology, so let’s take a closer look at stable currency.
The history of stablecoins
If you think that the concept of stable digital currency is brand new, then you are wrong, because the idea of stable digital currency is actually quite “old”.
In 1996, Gold & Silver Reserve Inc. launched E-gold. It uses the user’s account to be priced in grams of gold, so that a user can easily transfer money to other users, but after a period of time, due to legal issues, the operation stopped.
In 2006, they re-created a stable coin service project in Costa Rica, named Liberty Reserve. There, users only need to provide their name, email address and date of birth to create an account and transfer money. Liberty Reserve USD and Liberty Reserve EUR are pegged to USD and EUR respectively, but in the 2013 money laundering case, the company was declared closed by the US government.
We currently do not have data to indicate how many stablecoins have been launched and closed in the past, but the situation of stablecoins is much better than before.
What can stablecoins be used for?
Stablecoins have actual use cases for individuals and institutions. Below I will introduce some comprehensive use cases.
1. Daily purchase and payment
Since stablecoins are suitable currency substitutes, they can easily replace the U.S. dollar, euro or your local currency. Therefore, there is no need to carry cash and cards in future transactions. We can directly use stablecoins to pay employees’ salaries. Therefore, stablecoins have the ability to change the way we use currencies.
2. Cross-border transfers
In 2018, research found that there were 689 million US dollars of funds moved across borders, and this series of transactions were mainly generated by miners. This is because the payment gateways they use are very slow and consist of high fees, so stablecoins can play a good role here. Because in the process of using stablecoins today, we can use lower transaction costs for instant remittance across countries.
3. Stable trading assets
Retail and institutional traders have gained many benefits in the process of using stablecoins. Because we know that the crypto market is very volatile, it will take a lot of time if you try to convert your cryptocurrency into currency, but stablecoins give us protection from market interference to maximize our profits.
Stablecoins provide us with free entry and exit opportunities in the crypto market without the need to convert cryptocurrencies into currencies that may charge high fees.
4. Prevent fiat currency inflation
In fact, many countries are facing the problem of inflation, such as Venezuela. Because the appreciation or depreciation of currency depends on many factors, but with stable currency inflation rules will not work. So we can use stablecoins to protect our currency from inflation.
Schematic diagram of inflation in Venezuela. The chart is provided by Statista/IMF.
Types of stablecoins
1. Asset mortgage stable currency
Asset-backed stablecoins are backed by other assets to help maintain their prices, and you can redeem your assets at any time.
Basically, asset-backed stablecoins are backed by three types of assets: 1. Legal currency, 2. Commodities, and 3. Cryptocurrencies. Let’s take a look at them separately.
- Fiat-backed stablecoin
Every coin will be mortgaged with stable coins, which means that if there are 1 million US dollars in stable coins in circulation, then 1 million US dollars of legal currency should be kept somewhere. When you cash out the stablecoin, the amount you cashed out will be paid from the reserve, and the stablecoin will be destroyed.
Tether is the largest stablecoin and ranks third in coinmarketcap by market capitalization. But Bitfinex, the company behind Tether, revealed last year that only 74% of Tether is backed by cash and securities. This is also the focus of the stable currency supported by legal currency-the trust in the central entity.
The biggest advantage of using legal currency to support stable currency is that it is easy to understand and convenient to use, because people are very familiar with the legal currency system. But the biggest disadvantage of stablecoins supported by fiat currency is that these are created on a centralized system, which means that there will be a single point of failure and trust issues, because you don’t know whether they properly retain fiat currency, regulatory supervision and efficiency issues .
- Commodity-collateralized stablecoin
Commodity mortgage stablecoins are backed by commodities such as gold, real estate, and oil.
It can provide you with a share of commodities that can be purchased. Because in reality, you can’t buy gold or oil in fractions, and you don’t need to consider the safety of storing gold, because it exists in digital form, so you can store it for a long time to fight inflation.
However, the disadvantages of commodity-supported stablecoins are similar to those of currency-supported stablecoins.
- Stable currency collateralized by crypto assets
The concept of crypto-asset-collateralized stablecoins is more interesting, because these stablecoins are backed by cryptocurrencies, so it provides us with a permissionless decentralized ecosystem.
Since all services are built on the blockchain, there is no trust issue, which means that you will never face the problems faced in currency and commodity-backed stablecoins. However, the price of cryptocurrency may fluctuate. In order to absorb these price fluctuations and mitigate risks, you may face the problem of over-collateralization, which means you may be forced to deposit $150 in cryptocurrency to obtain a $100 stablecoin.
- Unsecured stablecoin
This method means that the stable currency does not use any collateral to support it. In fact, the concept of unsecured stable currency is inspired by the legal currency system, because you know that legal currency is not supported by any tangible assets, but depends on people’s beliefs.
The main category of unsecured stablecoins is algorithmic stablecoins. This is the so-called “Seigniorage Supply” model. Its algorithms and smart contracts balance supply and demand. This means that when the demand for coins increases, more coins will be produced. On the contrary, when the demand decreases, it will buy these in circulation. currency.
In the end, the above model failed. Among them, the algorithm-stable currencies include Nubits, BitBay, etc., and most of them were not attractive or closed directly.
Now Meter is creating a stable currency, which is called a “economic consensus-based” stable currency. It uses the profit-seeking behavior of miners as a substitute, and it will not be affected by the many shortcomings of the algorithmic stable currency .
These are the most decentralized stablecoins so far, because most of the infrastructure is created on the blockchain, they do not require collateral, but it also has some disadvantages that algorithmic stablecoins depend on continuous future demand To succeed.
- Hybrid stablecoin
This type of stable currency is a combination of the above-mentioned multiple models, that is, it combines currency mortgage, commodity mortgage, encrypted mortgage and algorithm-into a single Token.
These coins combine the characteristics of more than one coin, which can attract some users and investors. But for other people, it may be difficult to understand and at the same time, if they are involved in any similar securities issues, they also need to be reviewed by regulatory agencies.
in conclusion
Stablecoins are our daily and trading necessities, but if you find that stablecoins with collateralized assets have other more shortcomings, then hybrid stablecoins also have similar problems.
