Is stablecoin our future? .Stable coins provide convenience, privacy… | Author: Omer Kerman | Capital | June 2021
In this article, we use analogy stories and examples to explain the topic of cryptocurrency. So today, we want to explain what stablecoins are and how to best use them to take advantage of your cryptocurrency transactions.
First of all, what is a stable coin? Technically speaking, a stable coin is a utility token built on the blockchain of another coin. If you don’t know the difference between coins and tokens, you should check our previous article on the subject. But the whole goal of stablecoins is to create a cryptocurrency that does not fluctuate and does not change its price. Stable coins provide the convenience, privacy, and security of cryptocurrencies, while providing the stability and trust of fiat currencies.
Stable coins are pegged to the U.S. dollar and should always be equal to 1 U.S. dollar in theory.
Bitcoin is the first cryptocurrency designed to be used as a store of value. However, since it has not been widely adopted and there are not too many regulations, the price fluctuates greatly. So much so that it is classified as a speculative investment. So, what if you want to use encryption technology to store funds, but don’t want to put your investment at risk due to the price fluctuations of cryptocurrencies in the world today, what should you do? Well, you can use reliable stablecoins. Before we learn more about stablecoins, you first need to review the difference between centralized exchanges and decentralized exchanges.
A centralized exchange is an exchange owned by an entity, such as Coinbase. But they allow you to buy and sell cryptocurrencies. Since they are a company, they are technically regulated by the government. On the other hand, is a decentralized exchange not an exchange operated by a company, but an exchange operated by a code. Changes to the exchanges only occur when the code changes, and due to their decentralized nature, the government cannot regulate, control or even close them as they did with Coinbase. With stablecoins, you can trade back and forth from Ethereum to stablecoin, from that stablecoin to Bitcoin, and from that Bitcoin to another stablecoin. Whenever you want to use a decentralized exchange. In this way, you don’t have to pay so many fees, you don’t have to wait for a long time, or you don’t have to worry about the government tracking or canceling your transactions, as if you have to do so using a centralized exchange.
Now, this is a very good advantage of stablecoins. Suppose you bought 100 Bitcoins for 100 USD. Bitcoin then rises to $10,000 per coin. Therefore, you sell 50 bitcoins at a price of 500,000 U.S. dollars, so you trade 50 of them to DAI or USDC, which are stable coins worth 500,000 U.S. dollars. Then when you can repurchase it at a lower price, you hold it. It’s almost like a cryptocurrency savings account. Stablecoins are also useful when investing in platforms such as AAVE or COMPOUND. You can earn interest on encrypted assets on these platforms. Because you don’t have to worry about price fluctuations. If Ethereum falls by half, the 20% apr is irrelevant to Ethereum. However, the 20 APR on your USDC stablecoin is delicious.
Moving on, we will enter some technical aspects. How does stablecoin work?
Well, mainly they work in two different ways; mortgage or through algorithmic mechanisms, also known as smart contract operations. These are a lot of big words, but we will break them down for you. First, legal mortgage means that every coin is backed by something. In most cases, this is one dollar. In the eyes of some people, it is the currency of other countries, such as the euro or even gold. In fact, Tether is one of the largest companies issuing its USDT stablecoin using legal collateral.
The advantage of fiat-collateralized stablecoins is that they are more stable than alternatives. However, they do have problems. One is that the money that needs to be invested in each USDT cannot be invested. This may mean that the company did not earn millions of dollars in interest. Another problem is that someone in the company may embezzle or steal large amounts of collateral. The last problem facing Tether is that it is difficult to prove that you have all the collateral.
Let us continue to use the second method. Because as an alternative to legal mortgage methods, some stablecoins are controlled by smart contracts. Some people call these algorithms pegged stablecoins. The advantage of this method now is that it is very easy to audit. You only need to view the smart contract code. Another advantage is that there are no tangible assets that can be stolen. However, some problems seem to be worse. Stable stablecoins controlled by smart contracts are generally more unstable. Just because of the way they work. What they did is they had to manipulate the supply of tokens to adjust the price.
Now every stablecoin has a different algorithm, but there are mainly three algorithms. We might actually write an entire article about these three specific algorithms. The number of coins in the wallet is changed every time it is checked. So the value remains roughly the same, one dollar. The second system uses a money printing machine and a bond reward system to adjust the price to one U.S. dollar. The third is very similar to the second, but it uses something called a coupon. How do they work?
But moving on, how do you buy stablecoins? In short, stablecoins are bought and sold on centralized and decentralized exchanges. It is very easy to buy Tether or daı or USDC on centralized exchanges like Coinbase or Gemini. Another way is that you can buy something like Ethereum on Coinbase, transfer it to your private wallet, then use a decentralized exchange like Uniswap, and trade eth into stablecoins.
It’s time to be more pessimistic about the topic of stablecoins. Although stablecoins do have good characteristics, there are a few things you should consider before you completely abandon your savings account and put all your savings into stablecoins. The first is the lack of insurance. When you deposit money in a bank savings or checking account, the government will provide insurance for it. At least if you are in the United States. Some banks have FDIC insurance, which means they will repay you up to $250,000 worth of funds stolen or lost from the bank. Stablecoins do not have this advantage yet. If a company that started and operates a stablecoin goes bankrupt, you will most likely lose all your investment and be empty-handed.
Second, we must reopen the mortgage issue. Remember what we said, there are rumors that Tether may not actually have real cash support. If this is not the case, it will scare people and prices may fluctuate greatly. It may even cause it to decouple from a dollar, because Tether is only worth what people think it is worth, and now, it is a dollar. If the belief changes, then the value will change.
So to sum it up, stablecoins are a big step forward for cryptocurrencies, and we are very happy to see their development direction. If you invest money in it, we recommend that you remain cautious and conduct research as always.