Steemit Crypto Academy Contest / S8W2 - What are Stablecoins?

Hello crypto friends,

It is a wonderful opportunity to be among the participants of the steemit crypto academy engagement contest for the week 02 season 08.

This contest proves to be very educative and Interesting just like the previous contests, as this centers on stable coin which is very important in the crypto ecosystem.

Without any further ado, shall we proceed immediately to the main business of the day.

Stable coins can be explained to be cryptocurrency assets whose value is tied or pegged to that of another commodity, currency or financial instrument..

Stable coins were designed to provide an alternative to the high volatility of the popularly known cryptocurrency, including the leading cryptocurrency, Bitcoin, which has made crypto investment unsuitable for common financial transactions.

Although Bitcoin remains the leading cryptocurrency, it tends to be affected greatly by a high volatility in it's price or exchange rate.

For example, during the period of March 2020 and April 2021, Bitcoin price rose from $5000 to $50,000, only for it to fall over 50% in the next two months.

This volatility is good for traders but unideal for routine like transactions like buying and selling.

Investors holding cryptocurrency for a long term don't want to be known for buying 2pizzas for 5000BTC, and every merchant don't wanna be in loss if the price of a cryptocurrency asset plunges after they have been paid in it.

To serve as a medium of exchange, a currency which is not legally accepted worldwide must possess some level of stability which serves as an assurance to those who accepts it, that it will retain it's purchasing power in few months.

And this is where the use of stable coins come to play.

Stable coin ensure to manage a stable price by attempting to peg it's market value to an external reference, most often a fiat currency.

The stable coin are more useful as a medium of exchange when compared to a more volatile cryptocurrency.

Stable coins are pegged to currency such as dollar, or to a price of a commodity such as gold or it may make use of an algorithm to control supply.

Stable coins were created in an attempt to design a cryptocurrency/ token with a more stable price which can be used to facilitate financial transactions.

For example, Mr A wants to sell a commodity worth $5 to Mr B and they intend to use STEEM as a medium of payment.

As at when the exchange was taking place, STEEM price equal to $5, and the transaction was done successfully.

Due to the volatility of STEEM token, if the price of STEEM rises to $15 per token, Mr B wouldn't be happy that he purchased a good with STEEM when STEEM price was $5, he is in a loss already.

Now, if STEEM price reduces to $4 after the transaction has been made, Mr A would be in a loss which is harmful to the growth of his business.

To avoid such regrets after accepting cryptocurrency as a medium of payment, the stable coin was created.

With the creation of the stable coin, you can carry out financial transactions using the stable coin as a medium of exchange without fear that it will loose its purchasing power.

Stable coins are very useful in so many ways but the most common one is that it makes cryptocurrency more acceptable as a medium of exchange.

Examining the illustration I gave above, if the medium of exchange used was a stable coin instead of steem (a volatile) token, both parties would have been happy after the transaction with no fear of loss.

Another usefulness of stable coin is that it helps to prevent loss in value of ones asset.

Unlike other volatile tokens, stable coin seldomly looses value, it always retain the value of the currency it was pegged to.

There are different types of stable coin in the cryptomarket that can be used as a medium of exchange.

Shown below are the different types of stable coin

• USDT
• USDC
• UST
• BUSD
• TUSD
• SBD
• HBD
• GUSD
• USDD

Personally I love making use of USDT, it is the popular and most commonly used stable coin.

Usdt which is known as Us Dollar Tether can be found in any exchange (centralized and decentralized) and it seldomly looses it's value.

When I was introduced into the crypto space, my mentor made use of usdt and taught me to make use of it also.

The answer to the above asked question is a resounding yes, stable coin can lose their stability.

Some stable coins are backed by assets while some are backed by volatile cryptocurrency.

Sometimes, stable coin lose the parity to the assets to which they are pegged and this happens as a result of mismanagement of the reserves or as a result of faulty designed codes.

There are various examples of stable coin that has failed but the most recent one is that of UST.

Now follow along as I explain why the UST failed.

As I earlier mentioned, some stable coins are backed by fiat currency, some by algorithm and others by volatile cryptocurrency.

The UST coin is an algorithm stable coin created by the Terraform labs on the terra network.

While other stable coin such as the USDT USDC are backed by fiat currency, the UST was not backed by any real asset, instead it was backed by Luna, it's sister token.

The belief was that a clever mechanism could be used by Terraform Labs along with billions of bitcoin reserves to maintain UST peg without the backstop of USD.

The UST and it's sister currency Luna crashed because it lose its peg to a dollar and this is because it was not backed up by a fiat currency, instead it was backed up by an algorithm.

There are lots of advantages and few disadvantages of stable coin when compared to traditional cryptocurrency, please follow along as I mention them.

• LESS VOLATILE COMPARED TO TRADITIONAL CRYPTOCURRENCY:

One of the major advantage of a stable coin when compared to a traditional cryptocurrency is that the stable coin is designed to be less volatile.

This means that the stable coin is not easily affected by the manipulations going on in the cryptomarket.

It retains it's pegged value despite all odds.

• IT CAN BE USED AS A MEDIUM OF EXCHANGE:

Due to the fact that the stable coin is less volatile, it can be used as a medium of exchange, without any fear as to its rapid change in price.

This implies that stable coin can be used to make purchases of goods and services in our normal world and it will be accepted.

• BRIDGES THE GAP BETWEEN FIAT CURRENCY AND CRYPTOCURRENCY:

Another advantage of stable coin over cryptocurrency is that stable coin helps to bridge the gap between fiat currency and cryptocurrency.

Cryptocurrency is highly volatile unlike fiat currency, and this is a huge gap but with the help of stable coin, this gap has been bridged.

• USED AS AN INTERNATIONAL MEANS OF PAYMENT:

The stable coin can be used as a means of payment between two countries.

For example Nigeria and USA, both countries make use of different currency as medium of payment but the use of stable coin can unite them.

The both country can easily accept a stable coin as a means of payment.

• CENTRALIZATION:

While the notion of cryptocurrency and blockchain technology promotes decentralization, the design of stable coin brings about centralization, especially when it comes to the backing of the assets.

To ensure that each coin in circulation is backed by an equal reserve values, a team will be needed.
And this pushes forward towards centralization.

• ZERO RETURNS FOR INVESTMENT MADE:

One disadvantage of a stable coin is that it cannot be used to make profitable investment.

Whatever capital invested in a stable coin will forever remain the same as the coin lack volatility.

Indeed, the introduction of stable coins to the crypto space has been of more advantage than disadvantage.

With the use of stable coin, the gap between cryptocurrency and fiat currency have been bridged.

And also, stable coins can be used as an international means of payment.

I appreciate the host of this contest for the creativeness of this contest.
I look forward to participating in the week 03 😊.