Stablecoins or Cryptocurrency with a Stable Rate

All users familiar with cryptocurrenciesWe are aware of their significant disadvantage as a means of payment. We are talking about high volatility, extremely unstable rate. In practice, this leads to the fact that literally in a few days or hours can be lost up to 50% of invested funds. This fact makes it difficult to use cryptocurrencies even as a transit currency for online exchanges.

However, there is a project that aims to solve this problem – Stablecoin. In this article we will consider this issue.

 

What are Stablecoins?

Stablecoin is a new type of cryptocurrency that features a fixed volatility. In translation, “stable” means “stable” and “coin” means “coin. Simply put, stabelcoins are a stable cryptocurrency whose rate is not subject to such rapid changes and remains almost at the same value for a long time. This allows them to be used as ordinary means of payment – to buy goods, pay for services, or even pay salaries or pensions. There are also such global projects for the introduction of these payment systems.

Another fundamental difference between Stablecoins is the presence of actual collateral of value. For example, this role can be performed by the national currency of the state, or oil, precious metals, precious stones and other values. Collateral can be in fact any asset. The main requirement is its liquidity. If we classify by the type of collateral, there are 3 types of stablcoins on the market – fiat, crypto and non. In the first case, they are secured by fiat money, in the second – by cryptocurrencies, in the third – there is no collateral.

The availability of collateral goes against the principles of BitcoinThe first one is the “cryptocurrency,” where it is openly stated that the cryptocurrency is absolutely not secured by anything. Some analysts believe that this is an advantage. However, the result of this is already evident – extremely high volatility of the exchange rate. It is this fact that discourages most companies from deep integration of cryptocurrencies into payment systems.

 

Classification of Stablecoins by type of collateral

We have already indicated that there are three types of Stablecoin – fiat, cryptocurrency and unsecured. Let’s take a closer look at each of them.

Fiat-collateralized. This is a widely used collateral scheme in the world of finance. In practice, it looks as follows. Each unit of stabelcoin is a receipt with a commitment of a pegged pledge in the form of a specific amount of some currency (e.g., a dollar or a euro). Simply put, a certain amount of fiat money is taken as collateral, the amount of which must be equal to the number of stabelcoins released into circulation. For understanding we can give an example. Figuratively speaking, 1 Stablecoin equals 1 USD. To buy it, the user will have to pay $1. It is also possible to make a reverse exchange at any time – getting $1 back by giving 1 Stablecoin.

Features of Stablecoins with fiat collateral:

• A regular independent audit is needed to verify whether the amount of collateral corresponds to the number of cryptocurrency units issued. There is no “economic bubble.
• The presence of centralization, as the real collateral is concentrated in a third party. This increases the level of risk for investors.
• Strict regulation by government agencies. Deep integration into the real economy necessitates strict adherence to the rules and regulations established by law.

Crypto-collateralized. Here the scheme is similar to the one described above, but another cryptocurrency is taken as collateral – Bitcoin, Etherium, Ripple, LightCoin or any other. The advantage of this approach is the independence and decentralization of the system. However, unlike fiat stablenecoins, there is less rate stability. Significant changes in the market capitalization of the pledged cryptocurrency also lead to fluctuations in the Stablecoin exchange rate, though significantly less pronounced.

Non-collateralized. Stablecoins without actual collateral. What distinguishes them from conventional cryptocurrencies is their use of a methodology to maintain exchange rate stability through senorage. However, this approach requires constant growth and increase in the volume of cryptocurrency issuance. Otherwise, the exchange rate will not be able to remain fixed. Potentially unstable volatility is the main disadvantage of unsecured stackablecoins. Therefore, their development prospects are highly questionable – unlike the first two options.

 

Conclusion

Stablecoins is an interesting project, which definitely has prospects, as it is designed to solve one of the leading problems of existing cryptocurrency systems. However, at present, its practical implementation in the market has not reached significant heights. Perhaps in the near future this direction will be more widely developed. In conclusion, we emphasize that Stablecoin is not a dedicated cryptocurrency like Bitcoin or Ethereum, but a fundamentally new approach used to develop specific solutions.