Commoninfo:stablecoin

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Stablecoin

Stablecoin is a kind of cryptocurrency, the value of which is tied to an external asset, for example, to the EURO or silver, to stabilize the price.

Such a popular cryptocurrency as Bitcoin has its drawbacks like volatility and a large tendency to fluctuate. A bright example was when bitcoin grew by five thousand dollars after the Tweet of Elon Musk.

The stablecoin tries to solve the problem of price fluctuations by linking the value of the stablecoin to other more stable assets, usually fiat.

Fiat is a state currency that we are used to using on a daily basis (for example, euros or rubles) and which tends to remain relatively stable over time ( "although you can`t say that about ruble").

Usually, the community behind the creation of a stablecoin creates a "reserve" in which it securely stores the asset supporting the stablecoin: for example, a million rubles in a regular bank, which is equal to a million units of stablecoin.

This is how the stablecoin and the real funds that were tied to it are interconnected. The money in reserve serves as a kind of "collateral" for the stablecoin. In theory, as in practice, a user can exchange one stablecoin for one dollar at any time (in the case when the dollar acts as an asset).

A type of stablecoin provision

There are different types of stablecoins, and secured stablecoins use various types of assets as support.

"'FIAT'"

Fiat is the most common collateral for stablecoins. The US dollar is the most common among fiat currencies, but companies are studying stablecoins that are also linked to other fiat currencies, such as the euro or ruble.

"'PRECIOUS METALS'"

Some cryptocurrencies are tied to the value of precious metals, such as platinum or gold.

"'CRYPTOCURRENCIES'"

Some stablecoins even use other cryptocurrencies, such as ether, the Ethereum network's own token, as collateral.

Creation history

The first mention of stablecoins and their definition as a separate type of cryptocurrency arose back in 2012, with the advent of the Mastercoin project, which was tied to bitcoin. However, the developers never completed the project, so they soon forgot about Mastercoin.

The first serious project appeared relatively recently — in 2015. This is the first coin that attracted the attention of the crypto community to stablecoins. Of course, we are talking about "'Tether (USDT)"' . USDT was initially pegged to the US dollar at a rate of 1:1. In the process of development, the Tether rate has not always remained stable, however, over the entire history of its existence, fluctuations in the greater or lesser direction did not exceed 8%.

The idea of linking cryptocurrencies to popular fiat currencies was also supported by other developers, and since 2016, cryptocurrency analogues of the euro and the Japanese yen have begun to appear.

Are there any disadvantages?

Still, there are some drawbacks First of all it is:

"'1) Dependence on digital assets"'

In some cases, a stable coin may be linked to other crypto assets. This can create serious problems due to the fact that all other digital assets may be unstable, and therefore unreliable for other purposes.

2) Involvement of third parties

The truth is that the very essence of the stablecoin does not correspond to the philosophy of cryptocurrency, which consists in complete anonymity and decentralization, since it depends on traditional financial institutions of countries whose currencies are protected.

What are the prospects for stablecoins?

Despite some shortcomings, many in the crypto community are confident that this type of tokens has a great future ahead of them. Some experts believe that they can become a convenient tool for making transactions with real estate or securities.

Others say that the stablecoin will take the role of the digital embodiment of traditional assets, including fiat money. However, this requires close interaction between traditional and cryptocurrency trading platforms.