Asset-backed cryptocurrencies. This is probably the simplest definition of stablecoins that you are likely to come across. We know it is far from satisfactory though! This is exactly why we are going to talk about stablecoins in detail in this discussion. Well, the most remarkable feature associated with stablecoins is that they are not as volatile as popular crypto entities like BTC. This is primarily because these entities are deriving their market value from external references. And it is not fiat that we are talking about here! More like precious metals, which is why we talk about stablecoin types in the next section of this discussion.
Stablecoin types
Stablecoins are categorized based on their working mechanism. Using this reference of classification, there are three main types of stablecoins. These are fiat, crypto, and the non-collateralized algorithmic stablecoins. Oh, and there are precious metal-backed stablecoins as well! Let us briefly talk about these types in the following lines of this discussion.
1- Fiat
What does being backed by fiat suggests? It means that for issuing a particular number of crypto tokens of any cryptocurrency under consideration, the issuing party must showcase USD reserves equivalent to the amount of crypto being issued.
2- Cryptocurrencies
In the case of crypto-backed stablecoins, the value here is pegged into another cryptocurrency. Thereby, one can expect an element of volatility associated with these coins. Also, these coins are not considered safe either, since there is an element of risk associated with these. In this case, a large reserve of cryptocurrency is needed for issuing a smaller number of stablecoins.
3- Valuable metals
Here, the assets backing a stablecoin are gold and silver. We will talk about these in a bit more detail when we discuss stablecoins on Stellar a bit later in this discussion.
4- Algorithmic stablecoins
It is a working mechanism from which stability of such stablecoins is derived, rather than any assets in the reserve. More often than not, it is a consensus mechanism that makes a call on adjustments that should be made with regards to the demand of a particular stablecoin.
Role of stablecoins in crypto
We have already mentioned the volatility that is associated with cryptocurrencies like Bitcoins. The exaggerated swing in their value raises the need for cryptocurrencies which can maintain their purchasing power over a longer period, and feature minimum possible inflation. Only then users will feel encouraged to spend crypto rather than save it. Stablecoins play this role perfectly, since their value is exempt from volatile and wild swings.
Stablecoins on Stellar
Because of the reasons that we just described, stablecoins are garnering a lot of popularity on the Stellar network as well. However, Stellar has set a few standards which must be met, if a stablecoin is to be deemed worthy enough of being traded on the Stellar Lumens network. Firstly, it should be stable, liquidity wise. This takes care of volatile swings that are associated with cryptocurrencies. Other values factored in by the network include Standard Deviation and the Yang-Zhang volatility.
In the following lines of this discussion, we talk about some of the most popular stablecoins on the Stellar Lumens network.
1-Anchor USD
This is probably the most well-recognized stablecoin on the Stellar Lumens network. A stable token that runs on the Stellar blockchain, Anchor USD allows users to earn interest on Stellar Lumens (XLM) and USD with unparalleled and unprecedented ease and convenience. The Anchor USD app allows users to store other cryptocurrencies as well. We are talking about BTC, ETH, Litecoin, and XRP, to name a few here. In terms of trust & transparency, Anchor USD is a top of the shelve stablecoin.
2-EURT
Short form of Euro token, EURT is a stablecoin that is pegged to euros. Hence, we are sure that you can understand why EURT’s value will remain at one euro always. This is one of the first EU anchors on the Stellar Lumens blockchain. It is also the first anchor to implement path payments as well. The issuing agency for EURT is an EU licensed bank which is a trustworthy name as far as the remittances and money transfers are concerned.
3-EURB
This is yet another stablecoin that has its value reserved against the Euro fiat. What is the key difference between EURT & EURB? The latter is issued directly by Bankhaus von der Heydt. This is a banking institution that has been providing its services since the 18th century!
4-GOLD, PLAT, PALL
Stablecoins worth gold, silver, platinum, palladium are available at Mintx. The fascinating bit about the Mintx service is that it lets you redeem your tokens for actual gold, platinum, and other precious metals.
5-USDC
Another rising star, USDC is another coin that can be redeemed at $1, since its value is pegged into USD as well. It is a recent breakthrough in the crypto world, so keep a close eye on this one as well!
Cons of stablecoins
Stablecoins are great. But it is our responsibility to present both sides of the picture honestly. So, here are a few drawbacks that came to our attention. Firstly, the stability of a stablecoin is tied to the asset which is keeping it stable in the first place. Hence, users will have to keep an eye on the reserve asset’s price as well. And secondly, stablecoins defy the very concept which led to the creation of cryptocurrencies i.e. elimination of intermediaries. Users are simply annexing their hope to assets which they have no control over when they are investing in stablecoins.
Conclusion
Well, folks that would be all from this discussion. We hope that this article helped in dispelling the notion of unpredictability that is associated with cryptocurrencies. There are a few sane ones in this insane world as well! Stablecoins are a great tool for bridging the gap between fiat and cryptocurrency. Keep learning about stablecoins, for they have to play a major role in the crypto world in the future. With that word of advice, we bid you farewell from this discussion.
