🎧 ☝🏾☝🏻☝🏿
Today’s Lesson: Stablecoins - Level: Beginner
What Are Stablecoins?
Stablecoins are cryptocurrencies that are generally pegged to another hard or digital asset to ensure the price remains consistent. This allows the stablecoin to be used and traded in everyday commerce with confidence. Stablecoins offer crypto investors and users an off-ramp to hold their money and not have to fully convert back to fiat in volatile markets without the worry of it losing its value.
Stablecoins came into existence in 2014 as a measure to improve mainstream use of cryptocurrencies and create a balance to the short-term high volatility that exists in this young and growing crypto market. Take Laszlo Hanyecz for example, who in 2010 used 10,000 Bitcoins to purchase 2 pizzas worth about $40 at the time. Today, that same amount of Bitcoin is worth over $393 million.
At the moment, this type of short-term volatility makes cryptocurrencies not the most optimal choice for everyday use. This will change as the market matures. Ideally, a crypto coin or token should maintain its purchasing power and have the lowest possible inflation, sufficient enough to encourage spending the tokens instead of saving them. Stablecoins provide a solution for achieving this ideal behavior.
Many view stablecoins as the bridge between cryptocurrencies and fiat money. They are built to not fluctuate in price while still giving investors and users the benefits of crypto. Overall, stablecoins provide the benefits of blockchains and smart contracts along with the stability of reputable fiats.
Types of Stablecoins
Fiat-backed - stablecoins are backed 1:1 to a fiat currency (mostly the US dollar). This means for every dollar of that specific stablecoin that’s issued there is an equal amount of fiat dollars held in a traditional bank by the issuer of that stablecoin. This ensures that the stablecoin maintains an equivalent value to its fiat peg. Issuance is managed by a smart contract. An example of this is USDC.
Crypto-backed -stablecoins are backed by other crypto assets. In this case, the stablecoin derives from a defi protocol that holds a pool of other cryptos (like Bitcoin, Ether, etc…) to maintain its price. To account for volatility, the pool is over collateralized; this means that to maintain the price of $1 the stablecoin protocol is programmed to ensure $2 or more dollars worth of the other crypto assets is locked into the pool. An example of this is DAI.
Precious metal-backed - are backed 1:1 by precious metals such as gold, silver, and others; the most common are gold. Similar to fiat-backed stablecoins, for each issued stablecoin there is an equal amount of that precious metal held by the issuer. Generally, 1 issued stablecoin equals 1 oz of that particular precious metal. An example of this is PAXG.
Algorithmic - stablecoins are not backed by any asset. They are a protocol-generated stablecoin that is managed by smart contracts to adjust its circulating coin based on supply and demand. Most are pegged to the US dollar and if demand for the stablecoin is high, and each coin exceeds $1, the supply will increase. If demand is low, supply will decrease. The logic behind this is by increasing supply the price is brought down back to $1 and by decreasing supply the price move up back to $1. An example of this is AMPL.
Other Lessons You Might Be Interested In -
Market Summary -
Click here to view today’s market summary.
Are there topics that you’re interested in learning more about? Mention it in the comments and don’t forget to ❤️ and share. Not a subscriber? What are you waiting for?
Share this post