Steemit Crypto Academy Contest / S8W2 - What are Stablecoins?
Hello everyone and welcome to my post. I am a first-time writer in the Steemit crypto academy community, I am also a newbie in the crypto world but what is the essence of an academy if one can't learn, so this challenge allowed me to do lots of research on Stablecoins, and I am willing to share them here. So without any further ado, let's begin with the challenge.
Use your own understanding to explain what are stablecoins? And how did you manage to ensure a stable price?
Stablecoins as their name implies are cryptocurrency assets that are stable. They are coins that can be pegged to fiat currencies like the dollar, raw materials like Gold, and other cryptocurrencies. They help users and traders to a stable value for their crypto assets since they are backed by collaterals such as Bonds or physical assets which they are backed by to ensure they are stable. It is important to know that Stablecoins are utility tokens and they are built on a blockchain which is usually not their native blockchain. For instance, USDT functions on the Ethereum Blockchain, the Tron Blockchain, the USDC coin is built on the Ethereum Blockchain, and so on. Its goal as its name implies is to ensure stability against volatility, so it is going to 1:1 against anything it is backed.
These stablecoins maintain their stability by pegging their value to their backed assets be it fiat, cryptocurrency, commodity, or algorithm. For instance, when a coin is backed by fiat like the US Dollar, then the coin will remain at 1 coin equals to 1 USD.
Stablecoins are of different types, ranging from Asset Based Stablecoins, Crypto-backed stablecoins, Commodity-backed stablecoins, and Algorithm stablecoins.
- Asset-Based Stablecoins
These crypto stablecoins are backed by fiat currencies such as US dollars and they have their reserves in fiat currencies. With this type of stablecoin, for every token in circulation, there is a fiat-backed reserve. For instance, if 1 USDT is in circulation, then 1 USD is stored in reserve since it is backed by the US dollar.
- Crypto-backed stablecoins
These stablecoins are backed by cryptocurrencies rather than fiat. These coins can be issued to track the cryptoccurencies that back them. These coins must have the same supply as the currency that backs them as well and they can be built on a different blockchain. For example, Wrapped Bitcoin (WBTC) is a stablecoin issued on the Ethereum blockchain but backed by Bitcoin.
- Commodity-backed stablecoins
These are stablecoins that are blockchain base of commodities or backed by commodities like oil, gold, real-estate, and other precious metals. This coins are regarded as they follow the price of their backed commodities but that doesn't mean they will not fluctuate in price but these price are dependent on their backed commodities. Example of a commodity based stablecoin is Tether Gold (XAUT) which is backed by gold and built on the Ethereum Blockchain.
- Algorithm stablecoins
Just as name, these stablecoins depend on complex algorithm to keep their prices stable. These stablecoins functions as the central bank of the currency being backed. An example of an Algorithm stablecoin is USDD which is built on the Tron blockchain.
Why were stablecoins created and how are they useful?
Stablecoins were created to help traders and users maintain stability in a volatile market. The first fiat backed stablecoin was initially created as a fiat currency replacement on exchanges and in wallet for people who didn't want to old fiat but wanted to have the value for their money in cryptocurrency.
In recent times, stablecoins are used to identify rate in lending in the Decentrilized Finance (DeFi) space, instead of lending from traditional banks. It has also become a safe haven for traders who want to keep their profit and cryptocurrency asset value during the bear market.
What are the most popular stablecoins? Which do you use more and why?
- USDT
The most popular stablecoin is USDT, and this can be because it is the oldest coin and it has been minted on different blockchain which includes Bitcoin, Ethereum, EOS, Tron, Algorand, Bitcoin Cash and OMG blockchains. USDT is more popular than other stablecoins such as USDC, BUSD, and USDJ. USDT has a circulating supply of 72,074,498,292 USDT and each coin is backed by 1 US dollar. USDT is traded on virtually all cryptocurrency exchange both centralized (CEX) and Decentrlized (DEX).
- USDC
This is the second most popular stablecoin after USDT. It is also a fiat backed coin which is backed by the US dollar. It has a circulating supply of 40,861,915,901 USDC but as at the time of writing, it broke its peg and a lot of people lost money.
- BUSD
SImilar to USDT and USDC, BUSD is backed by the US dollar and it is built on the Binance blockchain. It is the third most popular stablecoin in the cryptocurrency world. Currenctly it has a circulating supply of 8,396,420,505 BUSD.
Being the most popular and traded stablecoin, I will be using it. Do not mind that I use the phrase "I will be using it". I used the phrase because like I said, I am a newbie to cryptocurrency in general but I did my research on USDT, and I will be using it more because it can be stored on several blockchains which includes Bitcoin, Ethereum, EOS, Tron, Algorand, Bitcoin Cash and OMG blockchain. On the Tron blockchain, it is very cheap and fast, which is a good thing that depicts the essence of cryptocurrency.
Can stablecoins lose their stability? If the answer is yes, then cite some cases with an explanation of the reasons of that.
This is an absolute YES following that USDC broke its pegging today, going below $1 and causing lots of users to lose money. A stablecoin can lose its peg if there isn't enough backed reserve in fiat currency, gold, or any other backed currency to back the stablecoin.
The only reason why USDC is still at $0.98 is because the team are transparent to why the coin fell which is as a result of having a reserve of about 8% valued at 3.3 billion dollar in Silicon Valley Bank which currently collapsed on friday. The stablecoin has maintained its stability has its team has been transparent and funds have been managed properly. If there is no transparency and lack management, the public will lose trust in the coin and it will cause it to lose its pegging which could take down to zero.
What are the advantages and disadvantages of stablecoins compared to traditional cryptocurrencies?
Just like every other thing in the world, Stablecoins will have their positive and negative side which will be referred to as advantages and disadvantages. Their positive sides include;
Advantages of Stablecoins
It is not volatile, so traders can have the value of whatever asset it is backed against in their wallet. If it is backed against the dollar, then they will have their stablecoins at the value of a dollar per coin.
It is liquid and can be used for several transaction without being scared of being less available.
It is cheaper to tranfer compared to cryptocurrency such as Bitcoin (BTC)
Disadvantages of Stablecoins
Stablecoins are not privy to pumps and bull runs.
SInce its stability is dependent on auditors and central entities, then it is liable to human errors which could lead to inaccuracy in the reserve value compared to what is minted.
A failure in the part of the centralized party can lead to depegging of the stablecoin, such as the closure of SVB on USDC.
Conclusion
While I am relatively new to the cryptocurrency world, I must confess that I learnt a lot from this challenge, and I hope to learn more as I continue to participate. Thanks a lot for this topic, as it made me learn a lot.
You can read through my Introduction post to know me. I invite @samminator, @ruthjoy, @majerius, @malikusman1, @steemdoctor1, @ninapenda, and @simonnwigwe
Gracias por tu comentario en mi publicación, me alegra ver siempre tu comentario. La criptomoneda aún es relativamente nueva y, con suerte, a medida que crezca, las cosas se pondrán en forma. Para mí, me encanta aprender y es por eso que estoy probando este desafío. Gracias por el comentario.
y vas por muy camino, te felicito!
We support quality posts, and good comments anywhere, with any tags.
Gracias por su valioso apoyo!
thanks a lot for the support. I appreciate.
Hello dear @thomisin You have presented the good explanation about the stable coins.Due to their stable nature and less volatility they prove very beneficial for the trading and staking or holding.
Stable coins are well known due to their nature and in the high bearish trends of the market they tend to maintain the stable value that make them the trusted coins.
You have explained clearly about the topic.
Here you have pointed out some major disadvantage sometimes due to the unpegging or the less entities for the backing up the assets is present to stabilise the price that tend to reduce the stability of the coin.
This stability lose sometimes cause the lose of many assets that is the major disadvantage. Overall the good efforts you have putted to create this article.
Good luck for the contest.
Generally, centralization and decentralization would find it difficult to work as people have lost trust in decentralized systems, and that's why most decentralized systems want to always reveal their audit bu when it comes to banks, they are the worst set to get into business with, and so many stable coins would need a reserve, and this is where the banks come in.
Interesting. You have open my mind to learn more about this topic. I wish you good luck.
Thanks for stopping by and reading, I am much grateful for your time.
Thank you, friend!
I'm @steem.history, who is steem witness.
Thank you for witnessvoting for me.
please click it!
(Go to https://steemit.com/~witnesses and type fbslo at the bottom of the page)
The weight is reduced because of the lack of Voting Power. If you vote for me as a witness, you can get my little vote.
Thanks a lot for the support. I am always happy to see you on my post. Thanks again.
We support quality posts, and good comments anywhere, with any tags.
Thanks for supporting my post. I hope to see more of you.
I actually loved how you wrote about stable coins on your post, I am really impressed that you made me feel fulfilled with your awesome knowledge.
Thank you so much for your kind words! I'm thrilled to hear that you found my post informative and engaging even though this is the first time I am trying this particular challenge out in this community. There's no greater compliment than this today, and your feedback means a lot to me. Thank you so much for your time, and your thoughts, I hope you continue to enjoy my posts in the future.
Am glad to see you getting involved in this amazing community.
Thank you for throwing more light on what a stable coin is. I have really understood why those coins are called stable coins.
Thank you and best wishes
Thanks a lot for the time taking to read through my post, it is great to have you on my blog.