What is a stablecoin and how does it work?

What is a stablecoin?

Stablecoins are cryptocurrencies whose value stands as a compound (pegged) with some traditional currency, commodities (e.g. gold, silver…) or some other financial instrument. The most famous stablecoins the dollar, which is the tehter’s usdt ( you can buy on our kriptomat), Circle’s USDC and Binance- this bus. The teams behind these coins claim that every The coin that exists in circulation has a coverage worth one dollars. This means that if you decide to sell at any time some of the above stablecoins you can do this at a price from one dollar. Stablecoins offer alternative to leading crypto currencies such as bitcoin and ethereum, and their biggest advantage is that It’s not nearly as volatile as other cryptocurrencies.

Why were stablecoins created?

In the past when you sold some cryptocurrency on an exchange, received you have the requested currency into your bank account. This means that every time you were selling or buying cryptocurrencies you needed your bank. In order to has avoided this need for banks within the crypto market made with stablecoins. This has made it easier to trade cryptocurrencies, and a larger number of pairs, i.e. the emergence of a larger number of altcoins. Another the advantage obtained from the creation of stablecoin is the possibility of withdrawing some traditional currency to your crypto wallet. That means that if you own a stablecoin (e.g. USDT) you can withdraw it on a crypto wallet whose keys are controlled by you. This is you allows you to have a stable currency such as the dollar, in your wallet and do not depend on the exchange office or bank. The only problem with this the method is that the team behind the stablecoin you keep on your wallet at any time can freeze (blacklist) your address.

What is the best stablecoin?

When we talk about the best stablecoin, it is necessary to know what we stablecoin is needed and how long we plan to keep it. If we is required liquidity with another cryptocurrency, it is likely The best option of Tether’s USDT. On the other hand, if we want to be safer, long-term Circle’s USDC should be somewhat safer with Because it is highly regulated in the U.S., so it shouldn’t have problems with losing connection, i.e. peggs, with the dollar. Sure, more we are not always fully regulated, safe and credible stablecoin, you will need to additionally work with regulators in order to came to the final solution.

Decentralized stablecoins

One type of stablecoin that appeared not so long ago are decentralized stablecoins. These cryptocurrencies claim to be successful Take over Bitcoin’s decentralized nature, and merge it with value some traditional currencies such as the dollar. The most famous example This type of decentralized stablecoin is UST, but if you look at it You will see that the price of UST does not equal one dollar. Namely, after finding numerous problems related to UST, stablecoin has lost peg, i.e. the junction with the dollar and the price fell. This led to the the collapse of the entire Terra ecosystem and in just a few days investors They lost over $40 billion. There are numerous reasons for this fiasco, but one thing is obvious, decentralized stablecoins are still in development and will probably take some time to find the balance between decentralization and security in order to gain investor confidence.

The great advantage of stablecoin

With the advent of stablecoin, a solution has emerged for citizens of countries with high the rate of inflation. Recently, inflation has been all around us. There are countries whose currencies are affected by triple digits Inflation. The citizens of these countries do not have too many solutions for this new problem. Bitcoin was originally created. to solve this problem, it is still too volatile and insecure. This is where stablecoins come into play. The citizens of these countries are full of more convenient to keep savings in digital dollars, which currently Inflation is slightly more than 6% than in domestic currencies. the value of which changes drastically from day to day. Still, this is far away from the long-term solution, since we all know full well that everything The world’s currency is gradually moving towards zero. The only right long-term the solution is a currency with a limited supply, which is precisely Bitcoin.

Problems with stablecoins

There are numerous problems with stablecoins, from what they centralized, up to the possibility of lost connections, i.e. pegga s property to which they are attached. Arguably the biggest problem is lack of transparency of their coverage. Teams that issue these stablecoins often keep some data private, so we can not with certainty to confirm the coverage of the same. This creates fear of investors and pushes some the type of uncertainty due to the possibility of a lost link with an asset for which They’re tied up. For example, arguably the largest stablecoin USDT, which issues Tether, it’s still not fully covered by the dollar but by various the value of which can be oscillated. Probably all USDT coins covered, but there are also probably days when derivatives that USDT covered have fluctuations in price and if a sale is requested All of the USDT coins, the Tether Foundation would not have enough money to pay off all coin holders. However, it is unlikely that USDT users will claim redemption over seventy in one day billions of dollars worth of USDT.

Central Bank Digital Currency (CBDC)

The Central Bank of England is a digital currency that Issued by central banks around the world. They are currently in development in the United States- in the European Union and some other countries. With a view to making them the bank’s value would be tied to the currency that The bank manages. The idea of these currencies is the absolute control of the bank over the the user’s money. The problem that many people see is absolute. control that banks and governments could abuse. They would have the possibility of freezing the funds of users, who say do not agree with some new rules. This is precisely why it was created Bitcoin. Decentralized, autonomous currency, where access to your Only you have the means.

Conclusion

Stablecoins have emerged as a mixture of cryptocurrency and traditional Currency. Nowadays, it will be difficult to get deeper into the crypto market without owning stablecoins, therefore we recommend that you get administrative on our cryptomates. Stablecoins use blockchain technology, and thus transactions are made publicly in the meantime, on the other hand, the stability of the They offer traditional fiat currencies. The biggest problem is the lack of regulation and uncertainty due to lack of records of coverage of these coins I make Currencies. One thing is obvious, the central banks have recognized this a fast-growing part of the crypto market, and they themselves became interested in developing their digital currencies. So-called CBDCs, which banks develop, could drastically reduce the freedoms of the individual, from the previous For these reasons, we must resist them. We hope you enjoyed reading today’s blog, and we would love to share your experiences with stablecoins with us on our social networks (Twitter, Instagram).