Stability in Digital Currencies- Steemit Crypto Academy- S4W5- Homework Post for @awesononso
Hello everyone!
There are many reasons why in investors are very cautious before investing in any crypto currency and one of these many reasons is the volatility of the coin's value. The volatility of a coin is a concept that affects every cryptocurrency, however, innovations in the crypto verse has introduced pro coiners to a new concept of stability.
This week's lecture handled by professor awenonso guided us deeper to better understand Stability in Digital Currencies.
Here are my responses to the homework assigned in the lecture post.
Question 1: Explain why Stability is important in Digital currencies.
source : pixabay
Since the creation of the first crypto currency (Bitcoin), digital currencies have become more recognized as an accepted form of money. Digital currencies simply refers to all forms of payment widely accepted that exists purely in electronic form.
Stability on the other hand is the ability of an asset (currency) to maintain it's value over a long period of time without experiencing any form of deflation or inflation.
Stability is very important in digital currencies for so many reasons and some of them are explained below.
- Unit of account
Digital currencies if stable, can be used to measure, account and report the value of other assets, goods, services, wages etc.
To better understand this concept, consider a scenario where 5 ETH (Etherum is a digital currency) was used to purchase 1 kg of gold and after a week that same 5 ETH can only buy ¼ kg gold. Ethereum has experienced inflation and to report sales in a record book as there will be conflicting values because in less than another 1 week Etherum might deflate and gain enough value which will allow 5 ETH to be able to purchase 1kg of gold once again.
- Store of value
Digital currencies if stable, can be used to store value for later use. If a digital currency is volatile, holders of that digital currency will not like to save for future needs like retirement or education because the holder runs a risk of losing value stored in the digital currency if it should experience any sort of inflation.
For example, if 50 Steem could afford a student's tuition fee for the next session and after saving up to 50 Steem, Steem price value experiences a dump by 50% , the student will no longer need 50 Steem but 100 Steem.
Question 2: Do you think CBDCs would be good in the future? Weigh the pros and cons in your own understanding and state your position.
source : pixabay
I do not think that Central Bank Digital Currencies (CBDCs) will be good in the future because the main aim of creating these types of currencies is to help the central bank of nations gain more control.
Even though the introduction of CBDCs will help reduce the cost of running the banking sector if innovations like e-wallets for CBDCs are created.
Finally, the only aspect which I feel the CBDCs will be good for future use is if there is one global central bank which it's CBDC can be used for transactions in every country of the world.
Moreover, CBDCs have some more advantages as we as many disadvantages.
Advantages
- Streamlining middlemen in banking services: The citizens who use the CBDCs will not need to own any physical bank account in any local bank because they can save, send and receive tokens in and through their e- wallets. This will also help citizens avoid unnecessary charges like , transaction and maintenance charges.
- Promotes financial inclusion: The introduction of CBDCs helps promote financial inclusion and simplify the implementation of fiscal and monetary policy
- legal government backing: CBDCs are launced by the Government's own Central bank,hence, these CBDCs will always be backed by the law which governs that nation. Unlike how Cryptocurrencies can be legally banned in some countries.
Disadvantages
- Lack of Privacy: CBDCs are always owned by a government which seeks control ,therefore, central authorities would be put in place to monitor the users and all their account activities. This actions will lead to lack of privacy.
- Low Technological Advancement of The Populace: CBDCs might be a success in developed countries since a majority of the population are conversant with technology required to use the CBDCs. However this is not the case for under developed and developing countries where very few people have necessary devices and the knowledge to use the CBDCs.
- Centralized: The main aim of creating the crypto currency was to create a decentralized form of finance. However, due to the launching of CBDCs by central banks users would not have full and total control of their assets. Users will also not be free from the financial policies of the Government.
Question 3. Explain in your own words how Rebase Tokens work. Give an illustration.
Rebase tokens are unique Cryptocurrencies which are regarded as stable coins. However, unlike the predominantly common stable coins like Tether which has its value tied to a fiat currency (US Dollar), the rebase token archives it's stability through a special means known as a Rebase mechanism.
The Rebase mechanism restabilizes the value of a token by adjusting the token's circulating supply when its price changes. Tokens which undergo this type of revaluation process are also known as Elastic Supply Tokens because the supply of these tokens change with price.
Furthermore, the Rebase mechanism works on the principle of basic demand and supply in relation to price.
The law of demand and supply states that The higher the supply of a commodity (asset, token or security), the lesser its value and the higher the demand of a commodity (asset, token or security), the higher it's value and vice versa.
Therefore, for a rebase token, when it is in high demand, the price increases, then the Rebase mechanism restabilizes the tokens value by increasing its supply in equivalent proportion. This would cause the price of the token to return to about its initial value.
On the other hand, when the Rebase token is in low demand, its price value will be decreased and this will cause the Rebase mechanism to restabilizes the tokens value by decreasing it’s supply in equivalent proportion. This would cause the price of the token to return to about its initial value.
What remains constant with Rebase tokens is that holders would still own the same percentage of the network because the whole supply adjusts as a single entity. However, of these Rebase tokens would notice that the number of tokens they have in their e-wallet will keep changing.
An illustration of how Rebase tokens work is shown in the block diagram below.
Question 4: Go to the https://www.ampleforth.org/dashboard/. Check the necessary parameters and calculate the rebase %. What else can you find on the page?
Source :screenshot
To calculate AMPL's Rebase, I visited https://www.ampleforth.org/dashboard/
And extracted the necessary values.
AMPL's rebases can be calculated with the formula;
Rebase % = {[(Oracle Rate - Price Target) / Price Target] x 100} / 10
Where;
Oracle Rate =$1.061
Price Target =$1.003
Therefore;
Rebase % = {[(Oracle Rate - Price Target) / Price Target] x 100} / 10
={[(1.061 - 1.003) / 1.003] x 100} / 10
= [(0.058/1.003) x 100] / 10
= (0.0578x 100) / 10
= 5.78 / 10
= 0.578%
Apart from the price target and oracle Rate there are so many other feature found on the page including;
- Circulating / Total Supply
Source :screenshot
- Next Rebase
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- Price chart
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- Supply chart
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- Market Cap chart.
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- AMPL CAM
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Question 5:Trade some tokens for at least $15 worth of USDT on Binance and explain your steps. (Give necessary Screenshots of the transaction
In this section I traded some of my BEAM tokens for USDT in order to complete the task. Below, I explained steps and showed screenshots of how I achieved a successful trade.
- Step1
I did was to login to my Binance wallet, I opened my spot wallet
- Step 2
In my spot wallet I chose to trade with the BEAM token, therefore, I clicked on the pair for BEAM /USDT and it took me to a trade page
Source :screenshot
- Step 3
On the trade page, I entered the quantity of BEAM I wished to sell ( 29.9546 BEAM) and clicked on the "sell" button .I got 41 USDT immediately.
Source :screenshot
Question 6: Transfer the USDT to another wallet with the Tron Network. From the transaction, what are the pros of the stable coin over fiat money transactions? (Give Screenshot of the transaction).
In this section I transferred some of the USDT I bought in question 5 from my Binance wallet to my trust wallet using the Tron network (TRC20). The steps I followed are explained with screen shots below.
- Step1
I opened my trust wallet and copied my USDT address
- Step 2
I went further to open my spot wallet on Binance in order to withdraw some USDT.I clicked on "withdraw" then a form pops-up. Here I input and confirm the wallet address am transferring to, the quantity of USDT being transferred (which is 21USDT), the transaction fee of incurred (1 USDT) and the network being used (Tron).
- Step 3
To confirm the transaction on Binance , a code is sent to both my phone number and my Gmail which I input before the transaction is completed and my trust wallet is credited with 20 USDT in about 1 minute time.
After completing the task above, I observed that using stable coins for transaction has wonderful advantages over using fiat currency. Some of these pros Includes;
- The transaction charges are very low when compared to fiat money transaction that are always higher. For the transfer of 20 USDT I was charged 1USDT, which is relatively cheap.
The speed at which the USDT reflected in my trust wallet was just within one minute which is far faster than Fiat money transaction which can take hours or days before a transaction is confirmed by the recipient.
Using stable coins offers a higher security level as a confirmation code is sent to both my Gmail and my phone number which is far more secure than Fiat money transactions that uses a password or finger print confirmation to complete transactions
Conclusion
Stability is a concept which is accepted in many fields of human life. Even in the value of a crypto currency stability is very important. Investors are very skeptical of very volatile assets and all Cryptocurrencies are considered volatile.
However, the introduction of stable coins in within the Cryptocurrency space has redefined the way investors see investing in Cryptocurrencies.
This week's activities has enlightened me more on the importance of stable coins in Cryptocurrencies.I am grateful to cryptoacademy and professor awenonso for this wonderful lecture and opportunity to learn.
