A Detailed Dive Into Stablecoins #004

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Hello great minds,

It is a new day and I am very happy to come before you all to discuss on an issue of great importance in the cryptospace.

I trust you are doing perfectly fine and are enjoying your activities in the community.

We have been discussing about fiat collateralized stablecoin coins and in our last discussion, we learnt on the advantages of fiat collateralized stablecoin.

Today, we shall be looking at fiat collateralized stablecoin from a different angle, we shall be learning some of it's dis-advantages, stay tuned.

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DIS-ADVANTAGES OF FIAT COLLATERALIZED STABLECOIN

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While fiat collateralized stablecoins offer so many advantages such as stability and usability, it also possesses some challenges and some of them are:

• CENTRALIZATION RISK:

The risk of centralization is another challenge facing the use of fiat collateralized stablecoin.

The custodianship of the reserve asset of a fiat collateralized stablecoin is typically centralized, and this can introduce a risk known as counterparty risk.

Here users will have no other choice than to trust the issuer to honor redemption request and maintain adequate reserves.

And counterparty risk implies that the private keys of a user will have to be under the control of the central authority and this is vulnerable to cyberattack which will inturn have a negative impact on the users.

• REGULATORY SCRUTINY:

Another dis-advantage of a fiat collateralized stablecoin is that it is subject to regulatory scrutiny.

Being a stablecoin, it often attracts the attention of the regulatory bodies as they raise concerns relating to Financial stability, money laundering and compliance to security regulations.

Changes due to the regulatory bodies can have an impact on their availability and operation, and this inturn will have effect on private individuals.

• AUDITING RELIABILITY:

The importance of transparency and accuracy of audit cannot be overemphasized.

Users tend to loose their trust in stablecoin of audit are not conducted or if the conducted audits are not reliable.

So as to maintain the interest of users in stablecoin, audit ought to be very transparent and reliable.

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CONCLUSION

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It is very important that we also consider some of the dis-advantages of a fiat collateralized stablecoin.

In our next discussion, we shall learn more about some challenges facing a fiat collateralized stablecoin.