Your whole crypto portfolio could go to zero!
The crypto industry is a big but still evolving space with high price volatility which could greatly take users' portfolio north or south.
Today, we'll be talking about stablecoins, how they work and their crucial role in the space.
Here's a sneak peek of what we'll cover in this article:
• Why are stablecoins needed?
• What are stablecoins?
• Types of Stablecoins
• Uses of Stablecoins
• Notable Stablecoins
• Are stablecoins really really stable?
• ...and many more
So let's get into it!
💎Why are stablecoins needed?
Cryptocurrencies, including Bitcoin, are known for their high levels of price volatility, which can make them difficult to use as a stable medium of exchange or store of value.
The market cap of many cryptos are relatively small which can lead to significant price fluctuations in a short time period.
Most cryptos fluctuate in value in a matter of hours making it challenging for them to be used as a reliable form of currency by the general public.
So, stablecoins have been developed as a solution to address this issue.
💎 What are stablecoins?
Stablecoins are basically cryptos whose value are relatively stable over short and long time horizons.
Stablecoins are not affected by the high price volatility of the crypto market.
They do this by being pegged to the value of another asset like a fiat currency and thus mirror its price and price action.
Stablecoins serve as a bridge between the world of cryptocurrency and traditional finance, as they allow users to hold and transact with a digital asset that is pegged to a known and stable value.
💎Types of Stablecoins
Stablecoins are stable, but how do they exist? Can they pump/dump? What's the mechanism behind it?
These factors depend on the type of stablecoin and we'll learn about them now.
There are 2 basic classifications of stablecoins.
- Collateralized Stablecoins
- Non-Collateralized Stablecoins
• Collateralized Stablecoins: These are stablecoins that are entirely or almost entirely backed by collateral held in a reserve.
There are 3 types of Collateralized stablecoins:
- Fiat Collateralized Stablecoins
- Asset Collateralized Stablecoins
- Crypto Collateralized Stablecoins
• Fiat Collateralized Stablecoins are those that have fiat currency reserves like USD, EURO etc. as collateral to issue a suitable amount of stablecoins.
It means that to issue a certain number of tokens of a given stablecoin, the issuer must offer dollar reserves worth the same amount as collateral.
Examples of fiat collateralized stablecoins are USDT (Tether) and USDC (USD Coin).
• Asset Collateralized Stablecoins are those that are backed by useful assets or commodities. Example of an asset that can be used as a backup is gold or oil.
Example of an asset collateralized stablecoin is the DGX token pegged to the price of Gold and backed by physical gold.
• Crypto Collateralized Stablecoins are those that are backed by other cryptocurrencies. Because the crypto collateral is volatile, crypto-collateralized stablecoins are usually over-collateralized to ensure that during extreme price volatility, there will be sufficient collateral value to backup the existing stablecoins.
An example of Crypto Collateralized Stablecoins is $DAI.
So that's for Collateralized stablecoins.
• Non-Collateralized Stablecoins
Also known as algorithmic stablecoins, are a type of stablecoin that maintains its price stability through algorithmic mechanisms rather than being backed by collateral.
They use algorithmic mechanisms to adjust the coin's supply dynamically
in response to changes in demand.
💎Uses of Stablecoins
Stablecoins are cryptocurrencies too, so they can function as a means of payment and value exchange while providing a stable store of value.
They are also used in Decentralized finance for many activities such as lending/borrowing and collateralization.
Stablecoins are very useful in the space as users can relate with the value of their fiat currencies but on the blockchain while also being protected from extreme price volatility.
💎Notable Stablecoins
Notable stablecoins are:
• $USDT issued by @Tether_to
• $USDC issued by @circle
• $DAI issued by @MakerDAO
and many more. These are the best options if you want to use stablecoins in DeFi.
💎Are stablecoins really really stable?
They are but they might not entirely be, here's what I mean ⬇
https://twitter.com/_igeorgee/status/1573216479352623104?t=hV41ckHtUh1VczT7JmnB-g&s=19
Hope you enjoyed this thread and got some valuable information.
Follow @Igeorge for more educational web3 guides and contents like this :)
