A Comprehensive Guide to Stablecoins. Learn what they are and why top regulators have shifted their attention towards them

Published 19 Aug 2021 by Radhika Aggarwal

Table of Content

  1. Learn More about Stablecoins
  2. How do Stablecoins affect cryptocurrency prices?
  3. How do Stablecoins work?
  4. Types of Stablecoins
  5. Advantages and Disadvantages of Stablecoins
  6. What is the future of Stablecoins?
  7. Conclusion

As the crypto market is still in its infancy, and not all coins are stable enough to be considered safe as a store of value, regulators have turned their attention towards stablecoins. The idea behind them is simple: they’re cryptocurrencies pegged to fiat currencies or assets like gold. This means they can provide stability for investors who want to keep their money in crypto without worrying about volatility.

A stablecoin is a cryptocurrency valued at the same rate as another currency to balance out its fluctuations. The most popular example is Tether, which has an exchange price equal to one US dollar and can be used on any crypto-platform or exchanged for cash without conversion fees.

Learn More about Stablecoins

A stablecoin is a digital currency with an asset backing of another cryptocurrency, precious metal such as gold or fiat. There are different types, including those backed by crypto and fiat currencies alike. For example, some cryptocurrencies may be backed with tokens from the same platform. In contrast, others may use their reserve funds to back their value instead of government-issued money like dollars, which can take years before they regain any semblance of stability due to inflation rates exceeding at least 3%. Meanwhile, Gold provides a more reliable option because no other commodity on earth shares its unique properties - durability combined with scarcity make this valuable resource perfect for ensuring continued trade throughout history!

Cryptocurrencies are a new asset class that has rapidly evolved in an increasingly tech-driven economy. As such, they can fluctuate greatly and change their value within seconds because of this evolution. Stablecoins were created to combat the price swings often seen with Bitcoin or other cryptocurrencies due to these changes since stablecoins have more stability by being pegged against another real-world asset like U.S dollars, for example, which is less volatile than the cryptocurrency itself given its history so far.

How do Stablecoins affect cryptocurrency prices?

Cryptocurrencies have no affiliation with any government or firm and are not bound by political, social, or other economic indicators. This makes the currency volatile since supply and demand are what drives it in this market. In addition, poor regulation has led to a lack of public trust in cryptocurrency as an accurate measure for investing, which leads to volatility because people can’t depend on them for stability like they could if there were better regulations set up so that these currencies would be more regulated properly instead of depending entirely on supply-demand relations within markets.

The power of the rich and powerful has been a persistent, global issue for centuries. Nowadays, it is estimated that half of the world’s wealth now belongs to only 1% while fewer than 500 people own 20% of all Bitcoins; these individuals who have come to be known as “Whales” play an active role in influencing cryptocurrency prices with their decisions on whether or not they want to convert some crypto assets into Stablecoins which can cause either higher rates if converted into Bitcoin when demand is high or lower rates due to lack of conversion during periods where no one wants them.

How do Stablecoins work?

Stablecoins work

Stablecoins are cryptocurrencies with a fixed value, so the price should not fluctuate frequently. Of course, a cryptocurrency can be tied to multiple fiat currencies, but some stable coins have an even more unusual fixation point - consumer prices. Because this currency’s stability relies on factors like inflation and economic growth within each country (or another index), they’re perfect for countries who want full control of their money without relying too heavily on another nation or system!

A stablecoin is a cryptocurrency that seeks to minimize the effects of volatility. The decisive factor for how well this happens in any given Stablecoin system is what method or methods are used by its organizer to maintain and regulate the currency that requires an external custodian who regulates their funds at all times. Hence, the value, as well as where on earth these mechanisms come from. For example, Tetcan issue new coins without losing control over inflation rates- but if you’re looking into building your own stable coin system, then you’ll want something more decentralized like using elasticity algorithms based on supply and demand, which would require no central party authority whatsoever.

Types of Stablecoins

Fiat-collateralized Stablecoins

This is the simplest version, with every Stablecoin currency produced in that particular country. Production and liquidation of these coins are all done by the issuers themselves. This system has many more similarities to our old practice, where each central bank would have some amount of gold on hand for every dollar it printed out. However, with this new digital twist, the price can remain stable because if you buy one coin for less than $1/USD at any given time, then they will exchange those coins back to their issuer (with interest) so that when either party exchanges them again, there’s no loss or gain involved other than what was initially invested/lost/earned from interest rates respectively as mentioned before during production and trading periods accordingly thereafter upon the expiration date.

Well-known Fiat-collateralized Stablecoins

Stablecoins backed by other asset classes

A few stablecoins are backed by a basket of multiple assets (commercial papers, bonds, real estate, precious metals, etc.). The value of these stablecoins can fluctuate over time, subject to movement in commodity and precious metal prices. Digix Gold, backed by physical gold, was introduced in 2018. SwissRealCoin, launched in 2018, had a Swiss real estate portfolio.

Crypto-collateralized Stablecoins

This protocol uses other cryptocurrencies as collateral for stablecoins. However, because these crypto values are not stable themselves, a set of protocols is used to ensure that the price remains at $1. For example, let’s say we deposit $200 worth of ETH and receive 100 USD worth of Stablecoin (stable) in return. The value is now 200% backed with ETH collateral, meaning if ether drops 25%, then you can still keep its stability even though there would only be 150 dollars left backing it up instead due to losing 50%.

Well-known Crypto-Collateralized Stablecoins

  • MakerDAO
  • Havven

Non-Collateralized Stablecoins

While most governments struggle to figure out how cryptocurrency will affect their monetary policy, some countries have already adopted a new form of currency called stablecoin. Unlike other cryptocurrencies that rely on collateral like gold or property assets for backing up their value, this type is backed by fiat currencies and has been pegged at $1 since it was created in 2016. Unfortunately, if we take the United States Dollar as an example (since they’re not technically pegged), there hasn’t been anything to back it with since 1973 when Bretton Woods Agreement collapsed; instead, US Fed Reserve manages all transactions between banks over time which creates inflationary pressures from money printing rather than recovering lost purchasing power.

Well-known Non-Collateralized Stablecoins

  • Basis
  • Carbon

Advantages and Disadvantages of Stablecoins

Advantages of Stablecoins

  • Benefits of Cryptoconomy.
  • Low fees.
  • Secure transactions.
  • Somewhat or completely anonymous.
  • Stable. Asset-backed.
  • Aids in Adoption. Acceptable (or easier) bridge from fiat to cryptocurrency use.
  • Regulations. Fiat-related regulatory processes involved.

Disadvantages of Stablecoins

  • Requires Third Party: Requires trust from an entity.
  • External Audits Needed: To ensure assets are accounted for.
  • Less Return on Investment: Traders and investors typically desire higher returns and may resort to other means for financial gains.
  • Regulations: Fiat-involving processes involved.

What is the future of Stablecoins?

With the crypto boom of 2017 behind us, investors are increasingly looking to stablecoins as a safer way to experiment with digital currency. In 2020 alone, demand for these currencies has skyrocketed by 94%. Within one year, their supply grew from $5 billion in June 2019 to an impressive total of 11 billion dollars! And regulators are warming up too; just last month, the US Office of Comptroller gave national banks and federal savings associations clearance on how they can manage reserves that back cryptocurrency issuers.

The Winklevoss twins, Circle and Coinbase, are all throwing their weight into the cryptocurrency market. They’ve made it clear that they want to see a digital dollar as soon as possible because there’s so much at stake if this becomes a reality.

The idea of having an entirely new currency is becoming more tantalizing with each well-known player who throws their hat into the ring for cryptocurrencies such as Bitcoin or Ethereum (Winklevoss Twins). This shadow currency would act as our physical dollars without risking its value on fluctuations in fiat currencies’ values over time due to government inflationary measures that can be manipulated quite easily when left unchecked.

Conclusion

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