what is a stablecoin and how does it work?

Stablecoins are an alternative to market volatility. In the world of cryptocurrency, we have numerous business projects whose purpose is to implement blockchain technology in our daily lives. However, one of the main problems that make Bitcoin and its siblings a difficult asset to trade is its high volatility. This, as it is said colloquially, is the fish that bites its tail. People invest in cryptocurrencies expecting its price to increase, but it will not increase significantly until mass adoption of this technology arrives. On the other hand, this adoption will not be easy due to the instability of prices. Currently it is speculation and trading that drives the value of cryptocurrencies up and down and not their use in real life.

 

 
It is normal for a small store, for example, not to want to accept Bitcoin as payment for fear that volatility will wipe out their profit margin , eliminating the profitability of their business . Given this and due to the characteristics of this digital asset, little can be done except the implementation of a system that allows the instant exchange of cryptocurrencies to FIAT money, or the use of the aforementioned "Stablecoins" or stable price cryptocurrencies.

what is a stablecoin?

If a merchant accepts Bitcoin as payment, but feels the need to immediately convert that monetary value into Dollars or Euros for fear of volatility, then it is really difficult that one day we will see cryptocurrencies as a standard means of payment in stores, supermarkets etc

In response to this need, Stablecoins are born. They are cryptocurrencies based on blockchain technology but whose price is stable because they are backed by fiat money or even by other cryptocurrencies.

What types of stablecoins are there?

Within cryptocurrencies with stable value we can distinguish three well-defined types. Each one brings a different point of view and comes to represent their own vision of how to solve the problem of volatility linked to block chain projects. In any case, these cryptocurrencies arouse great controversy because for large groups of the crypto community they go against the basic principle that Bitcoin defends as a limited asset. However, the truth is that these currencies have a quite practical use and in fact the “Tether” Stablecoin is within the TOP10 of the digital currencies with the highest market capitalization.

FIAT money backed cryptocurrencies

The first group of Stablecoins would be the cryptocurrencies backed by Dollars. This simply means that for each digital currency issued there is a dollar that supports it deposited in a bank account. Real money backing digital money. Among the FIAT-backed Stablecoins we can find Tether (USDT), TrueUSD (TUSD) and USD COIN (USDC).

A part of the community is against this type of currency because what is really being done is "tokenizing" FIAT money . In other words, what a person is really buying when they buy dollar-backed stablecoin is simply a check worth one dollar. In this sense, its only logical use and the application it has in the market is to convert other cryptocurrencies to false FIAT money in those exchanges that do not have the possibility of making transactions between cryptocurrencies and Euros or Dollars.

Cryptocurrencies backed by other cryptocurrencies

This is within the types of Stablecoins the one that behaves the most in a certain paradoxical way. The goal is to create a digital currency that has a stable value but is backed by another asset that is also volatile . Within the Stablecoins backed with other cryptocurrencies we can find Dai (DAI) and BitUSD (BITUSD).

The system therefore works by issuing only half the amount available to back the currency. For example, if a Stablecoin backed by another digital currency has a value of $1, that value will have to be backed with at least $2 of value in another digital currency.

Stable But Unbacked Cryptocurrencies

This type of Stablecoins works similar to a reserve bank but through a chain of blocks. It is based on the principle of keeping the value of an asset stable thanks to the control of the money supply according to supply and demand. If, for example, there is a high demand, a smart contract increases the supply of coins. If, on the contrary, the demand decreases, currencies will be extracted from the market so that the price of the asset is not affected . Within this category we find the cryptocurrencies Basis (Basecoin) and NuBits (USNBT).

What is a stablecoin used for?

If we use blockchain technology to create cryptocurrencies that maintain a stable price, it will be easier for them to be adopted in commerce. However, the principle of a currency that increases in value over time thanks to its limited supply would be waived. For this reason, over time, Bitcoin will surely end up consolidating as digital gold or as a store of value, and alternatives will have to be studied to offer people the best options to use this technology as a payment system .

The truth is that Stablecoins currently have no use beyond trading on exchanges. They are really very useful to freeze our funds and free them from volatility in times of bear market . The utility that is given to it in the future, and if it has a direct implication with commerce, remains to be seen.

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