A Detailed Dive Into Stablecoins #002

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Hello great minds,

It is a wonderful opportunity to come before you all today to discuss on an issue of great importance in the cryptospace.

It is a beautiful day and I trust you are doing perfectly fine and you are enjoying your activities in the community.

In one of our discussions, we learnt about stablecoins and we discussed about one of it's types which is fiat collateralized stablecoin.

Today, we shall be examining the mechanism of fiat collateralized stablecoin.

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MECHANISM OF FIAT COLLATERALIZED STABLECOIN

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There are different mechanism of a fiat collateralized stablecoin that helps it maintains its stability.

And explained below are some mechanism of fiat collateralized stablecoin

• RESERVE ASSETS:

The issuer of stablecoins often holds a reserve of traditional fiat currencies in a bank account , currencies such as EUR or USD.

The value of stablecoins in circulation is usually supported by this reserve, which often acts as collateral.

Here an equivalent amount of fiat currency is often held in reserve for every stablecoin issued.

• ISSUANCE AND REDEMPTION:

By depositing a fiat currency, users can easily obtain a corresponding fiat collateralized backed stablecoin.

An equivalent amount of stablecoins is released to them in their wallet.

The stablecoin holder on the other hand, can redeem their stablecoin with the issuer at any given time for an underlying fiat currency with a peg 1:1.

• REGULAR AUDIT:

In a bid to maintain transparency and trust, issuers of stablecoin often get themselves engaged in regular audits which is hosted by a third party firm.

This audit acts as a verification to confirm that the reserve asset is equivalent to the amount of stablecoin in circulation.

• COLLATERAL MANAGEMENT:

To ensure that the outstanding stablecoin is always covered, the issuer ought to manage the reserve asset prudently.

Any moment the reserve goes below the the value of stablecoin in circulation, there is usually an instability created which in turn can diminish the trust on the stablecoin

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CONCLUSION

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We have examined the mechanism of operation of a fiat collateralized stablecoin.

And we have learnt a lot from it's mechanism, in our next discussion, we shall be learning more about a stablecoin.

Please stay tuned