WHAT IS A STABLE COIN? – SUMMARY, TYPES, AND MORE
A “stable coin” is a kind of cryptocurrency that has its value pegged to another asset class, such as fiat currency or gold, to stabilize its price.
Cryptocurrencies like Bitcoin and Ether offer several advantages. One of the most basic is that they do not require the trust of an intermediary institution to send payments, opening their use to anyone in the world. However, a significant disadvantage is that cryptocurrency prices are unpredictable and prone to swings that often spiral out of control.
This makes them difficult to use for ordinary people. In general, people expect to know how much their money is worth in a week, both for their safety and livelihood.
Stable coins In A Nutshell
Stable coins attempt to deal with price fluctuations by pegging the value of cryptocurrencies to other more stable assets, typically fiat currencies. Fiat is the government-issued currency that we all use daily, like the dollar or the euro.
Typically, the entity behind a stable coin sets up a “reserve” where it safely stores the asset or basket of assets backing the stable coin, for example, $1 million in a former bank (the kind with branches, ATMs, and ATMs in the lobby). Support one million units of a stable currency.
Types Of Stable coin Collateral
Using this framework, stable coins come in a variety of flavour, and secured stable coins use a variety of asset types as hedges:
Fiat is the most common security for stable coins. The US dollar is the most popular fiat currency, but companies are also exploring stable coins pegged to other fiat currencies, such as US dollars. B. BiLira, which is pegged to the Turkish lira.
Some cryptocurrencies are linked to the value of precious metals such as gold or silver.
Some stable coins even use other cryptocurrencies like Ether, the native token of the Ethereum network, as collateral.
What Are The Most Popular Stable coins?
To give you knowledge of the ongoing experiments with stable coins, let’s review some of the most popular stable coins.
Diem (formerly known as Libra) is an emerging stable coin originally conceived by powerful global social media platform Facebook. Libra has had more psychological impact than any other stable coin despite not being launch.
Governments, particularly China’s, are now exploring their cryptocurrency-inspired digital currencies, in part because they fear they pose a competitive threat given that Facebook is a multinational company with billions of users around the world.
The Diem Dollar’s first stable coin was set to launch in January 2021.
Tether (USDT) is one of the first stable coins launch in 2014 and remains the most popular. It is one of the most valuable cryptocurrencies by market cap.
The primary use case for USDT is to quickly move money between exchanges to take advantage of arbitrage opportunities when the price of cryptocurrencies differs on two sales; Traders can make money on this spread. But it has found other uses as well: Russian-based Chinese importers have also used USDT to send millions of dollars across the border, bypassing China’s tight capital controls.
Launch in 2018, USD Coin is a stable coin co-managed by cryptocurrency companies Circle and Coinbase through the Center Consortium.
Before the transition to collateral pooling, USD Coin was pegged to the US Dollar with nearly $26 billion in circulating supply. By 2023, Circle said in a recent investor presentation that the offering is expected to reach $190 billion.
Dai runs on the Maker DAO protocol and is a stable coin on the Ethereum blockchain. Founded in 2015, Dai is pegged to the US Dollar and backed by Ether, the token behind Ethereum.
Unlike other stable coins, Maker DAO intends to decentralize Dai, meaning no central trusted authority controls the system. Instead, Ethereum smart contracts that encode rules that cannot be change have this function.