In the wake of the 2018 down-slide of the digital market, Bitcoin depreciated by up to 80 percent in value. As a result, a lot of investors in crypto tectonically shifted to putting their money into stable coins (here are the best stable coin to use in 2020). The assets have been referred to as the Holy Grail when it comes to cryptocurrencies, and such description is no overstatement. The volatility of virtual currencies stands as one of the big trees in a densely-forested area, posing a significant obstacle to mass adoption.
Apart from the fact that you can buy Bitcoin for a rate and sell it at another the next day, transaction speed is also a challenge. A big e-commerce company, for instance, could have hundreds of payments daily. So if the payment becomes overloaded, transactions will be stuck as though they were rigged right from the jump. There is also the issue of not being able to visit a bank and exchange your Bitcoin into fiat currency. However, the general good news is that stable coins are in the crypto-sphere work miracles for these problems.
So What's A Stable Coin?
If you hear the term Stable Coin, just understand that it is that type of cryptocurrency pegged to another stable asset, which could be gold or the US dollar. As you may already know, regular digital money such as Bitcoin is highly volatile, but stable coins, on the other hand, can be generally traded at a fixed price - hence the word "stable." Examples of these assets include Tether, Gemini Dollar, USDC, PAX, and DAI. The way they work makes them a bridge between the spheres of crypto and fiat currencies. Companies who operate in the space use some centralized authorities that back every coin with a one-to-one equivalent in USD or crypto. In the same way, the authorities control the price volatility.
At this juncture in the crypto market, stable coins serve as a gateway through which both new and repeat investors enter to make money. A good number of crypto exchange platforms out there have provisions that only allow users to deal with one digital token for the other. This is so because to convert fiat currencies into crypto is a relatively complicated process that involves repeatedly dealing with financial institutions and regulators in a variety of jurisdictions. If you are a first-time crypto buyer, one the easiest ways to get in is by turning your money into stable coins via exchanges that deal in fiat-to-crypto transactions.
Once you have your stable coins, thanks to platforms such as Coinbase and Coinsuper, and Binance, you can begin to trade hundreds of digital assets by using your fiat to buy cryptocurrencies. Nevertheless, if you want out of digital tokens due to volatility or some other reason, you can trade them back for stable coins. In the process, you don't have to move any money back to the fiat space.
Regardless of how basic this is, the use of stable coins is more than typically being a gateway to the trading cryptocurrencies. They can as well be used for everyday transactions, from buying coffee to paying salaries and getting your first piece of real estate. There are fewer barriers to mass adoptions compared to conventional crypto, which often comes with slow transaction speeds and scary fees, while volatility is still very much in the mix.
Types Of Stable Coins
There are three common types of stable coin, prominent among which are backed by the US dollar or other fiat currencies at a 1:1 ratio. In this case, the issuers of the coin hold the same amount of fiat currency in their bank accounts. To better understand, you can think of them as IOUs that are redeemable for the underlying assets.
In this market, the leader is Tether, also called USDT. It is issued by Tether Limited, a United States-based crypto startup. Nevertheless, following the firm's failure to provide an independent audit report, the price of the Tether fell to US$0.90 in October 2018. In spite of this, the asset remains one of the most-traded cryptocurrencies, boasting of a US$ 2 billion market value.
On the shelf of the US dollar-backed rivals, stable coins such as Gemini, TrueUSD, USDC, and Pax shine. Businesses regulated in the United States issues them, and their auditing tends to be a more transparent process. All of these offerings can be gotten on a majority of crypto exchange platforms.
Next to these is the second type of stable coin yet pegged to the US dollar but at a ratio of 1:1. However, the underlying collateral is other crypto assets, ether, for example. For every step of coin issuance completed, there is a set of protocols executed on blockchains. If you are an investor, you will need to deposit or lock up an amount of ether with more worth than the stable coin you will get in return.
They call it over-collateralization, and it is meant to act as a buffer to daily price swings that happen with ether. For this stable coin, there is no form of auditing required because all the operations take place on the blockchain. Examples of this are MakerDAO's DAI and Haven's nUSD.
The final stable coin model is unique, with its no-collateral characteristics. It may sound like some crazy algebraic expressions, but it remains a given that these stable coins put blockchain-based algorithms into their employ as a kind of central bank. The sole purpose of this is to control the supply of money in order to make sure the coins will never stop trading at US$1. Basis and CarbonUSD are examples of algorithmic stable coins.
Research has revealed that stable coins are not the only solution plaguing the crypto world. Equally capable of doing the job are insurance policies and derivative products from the conventional financial market. As it seems, there is a low demand for multiply stable coin models. Due to this, weaker projects are likely to get edged out of the market by the most influential initiatives.