Stablecoins. We keep hearing this term, but do you really know what they are and how they work? I will try to explain the basics, so you will know better how to deal with them. While Bitcoin provided the ground for the crypto-market, with all the technological advance and innovations, there are still some aspects needed to be improved. In order to follow this we also need some good tools.
Bitcoin in particular, and crypto in general, are different than money, even if they try to emulate them. Defining money, and by this i mean fiat money, there are three characteristics to keep tabs on:
- they are a medium of exchange of goods and services, with a common ground to determine value.
- they have a unit of account, a standard numerical unit of measurement for their market value for goods, services and any other transactions, and they can be used to compare goods using a common system (as in a house of 200k dollars versus a house of 2.3 millions dollars).
- they are store of value, maintaining their value over time and they can be spent without penalty at a later date (at least in theory without touching the concept of inflation).
What about the cryptocurrencies? They have value, but it is very volatile, so not ticking the box. Products can be quoted in Bitcoin or altcoins, but there is not a real, big enough market, and you cannot go and buy from most of the shops using BTC. So second box not ticked either. As a medium of exchange, it is quite volatile, and most people prefer to keep it until it gains more value, not really keen to use it to buy things. Third box not ticked also. The main problem is the the bitcoin is agnostic, with no clear realtion with fiat currencies (today can be 10.500 $ and tomorrow can ve 7.000 $). Because they are too volatile, the question was: how to make it stable?
And the answer came in the form of the stablecoins - cryptocurrencies that combine the advantages of the cryptocurrencies (security, immutability, cheap fees, instant transfer and global access) with the advantages of fiat (medium of exchange, unit of account, store of value). This way you can make a hybrid version to have the best of both in one crypto. A stablecoin has a stable price, in relation with dollar (or gold, or oil or other things, but mostly fiar currencies are used). In theory, again, as the dollar is not really stable if we go into details, but i stop here. A stablecoin is build on a crypto network, designated specially for it or already existing (Ethereum is used often). A stablecoin can be held in wallets (find more about how to choose the right wallets in this post), can be trasfered in a native transaction or as a token (think ERC-20 protocol).
The stablecoins will maintain their stability using one of the following three mechanisms:
1. They are fiat-backed, centrally collateralized (for each stablecoin you have a dollar stored safely, for example)
2. They are crypto-backed, decentrally collateralized (you send them 100 dollars and they mint 100 stablecoins for you)
3. They are using an algorythmic central bank, doing argorythmic balancing (this is a new method, still work in progress).
All the stablecoins have a set of properties. They have the same price as fiat currencies, with minor variations, but in the end the final price discovery take place in the free market. So, even if they say 1 stablecoin is equal with one dollar, the market can disagree with that. It happen once during the 'Untethering' scandal, when Tether came under investigation in October 2018, as some believed that it was not fully backed by dollar. USDT (Tether stablecoin) went down to 0.80 usd, just because of the speculation about this going on. But, in a surprising turn of events, in April 2019 Tether admited to only have 74% collaterals, not all of them being USD, and they took steps to remediate this problem. Back to our subject, a stablecoin is a digital representation of the fiat (think 1 USDT=1$). They can trade crypto conveniently against fiat currency, and they can have emergency use cases, mostly for online payment and financial services (DAI and USDC mainly).
As a curiosity, those are the market caps of the most used stablecoins:
USDT - 4.71Billions USD
USDC - 448 Millions USD
PAXOS - 227 Millions USD
TRUEUSD - 169 Millions USD
DAI - 103 Millions USD
gUSD - 4.73 Millions USD
USDT (Tether) as you noticed, is the biggest of them all, and it is used mostly for trading. It was issued by Tether LTD (BVI & HK company), a company extablished in Virgin Islands. Claim to have 1 USD for each USDT, but as i said before, this was a bit controversial in the past. It is issued on OMNI (BTC blockchain) and ERC-20 (ETH blockchain). It has ties with Bitfinex, and some believe that in fact they have both the same owners.
As for our two problems, you can transact in digital fiat currency, even if it is not fiat, as a matter of trust, but you cannot used them to casually pay for products or bills. The second problem is that any fiat in heavily involved in politics of the country emitting that fiat. And this complicates things a lot.
Hope you enjoyed this short journey! Take care and have an awesome day!
G
My crypto-related links (check ratings - 1 to 5 stars based on my personal experience)
Games to gain crypto
***** League of Kingdoms - link here: similar with Heroes of Might and Magic (worldwide - paying in DAI)
Exchanges
***** Binance( good for staking/savings ) - link here
***** Kucoin( good for staking/savings ) - link here
***** Coinbase( ideal for beginners )- link here
Investments
**** BlockFi (decent interest rates, but less choices than Celsius) - link here
***** Celsius.network (good rates of interests and monthly codes for free crypto, 1235256530 => my referral for $10 bonus ) - link here
**** Coinbundle (investing in crypto bundles) - link here
**** Stakecube (staking, masternodes and very easy to claim faucets for 28 coins/tokens) - link here
Wallets for multiple cryptocurrencies
***** Coinpot - link here (microwallet for all Moon faucets, Bitfun and Bonusbitcoin)
***** Atomic wallet - link here (microwallet for PUBLISH0X DAI, BAT and Loopring)
***** Spherewallet (for Horizen, combined with the faucet for extra bonus) - link here
**** Crypto.com wallet (good interest staking and 50$ bonus in MCO) - link here
Free crypto (faucets and more)
****Lbry.tv (free crypto for watching or making videos) - link here
**** Bitfun( 3 min countdown - automatically deposit to Coinpot wallet ) - link here
*** Bonusbitcoin( 15 min countdown - automatically deposit to Coinpot wallet ) - link here
**** Moon Bitcoin ( 5 min countdown - automatically deposit to Coinpot wallet ) - link here
***** Horizen faucet ( 20 hours countdown - automatically deposit to Sphere wallet ) - link here
*** Tezosfaucet ( 7 days countdown - automatically deposit to COINBASE or BINANCE wallet ) - link here
** Tron and other crypto faucet (24 hours countdown) - link here
Others
***** Publish0x blog (Free BAT, DAI and Loopring for reading/writing - can combine with Atomic wallet) - link here
***** Brave browser (Free BAT for using it, based on paid ads, very good AdBlocker and high speed) - link here
Disclaimer: This text also can be re-published on my personal blogs, such as this one.
