Stablecoins have become an increasingly popular cryptocurrency in the past few months. Currently, there are over a dozen stablecoins you may spend money on, if you want to store your funds in a price-stable cryptographic asset. In this guide, you may discover what stablecoins are, what their motive is and the way the different types of stablecoins work.
What Are Stablecoins?
Stablecoins are blockchain based virtual currencies that have been created with the intention to have a stable value. Stablecoins achieve price-stability through numerous different methods which includes a peg towards a fiat currency or a commodity, via collateralization towards other cryptocurrencies or through algorithmic coin deliver management.
Moreover, stablecoins — most notably GNG (1 to 1 pegged by GBP) — is also a popular asset among crypto traders who want to place their funds in pound during market downturns so they can avoid crypto price volatility when the market is moving against them.
Different Types of Stablecoins
There are four different types of stablecoins currently available in the market: fiat currency-backed, asset-backed, cryptocurrency-collateralized, and non-collateralized stablecoins.
Asset Backed Stablecoins
Advantages of asset backed cryptocurrencies are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk. Bitcoin and altcoins are highly correlated, so that cryptocurrency holders cannot escape widespread price falls without exiting the market or taking refuge in asset backed stablecoins. Furthermore, such coins, assuming they are managed in good faith, and have a mechanism for redeeming the asset/s backing them, are unlikely to drop below the value of the underlying physical asset, because of arbitrage.
Stablecoins backed by commodities such as precious metals (gold, silver etc.) are much less likely to be inflated than fiat backed stablecoins. The quantity of commodity used to back the stablecoin has to reflect the circulating supply of the stablecoin. Holders of commodity-sponsored stablecoins can redeem their stablecoins on the conversion rate to take possession of real belongings. The cost of maintaining the stability of the stablecoin is the cost of storing and protecting the commodity backing.
The value of stablecoins of this type is based on the value of the backing currency, which is held by a third-party regulated financial entity. In this setting, the trust in the custodian of the backing asset is crucial for the stability of price of the stablecoin. Fiat-backed stablecoins can be traded on exchanges and are redeemable from the issuer. The cost of maintaining the stability of the stablecoin is equivalent to the cost of maintaining the backing reserve and the cost of legal compliance, maintaining licenses, auditors and the business infrastructure required by the regulator.
Why Stablecoins Become So Popular?
Because they eliminate uncertainty for consumers — especially around conversions. Stablecoins provide the type of predictability that many countries struggle to achieve with their national currencies — hence why Venezuela, battling hyperinflation and political instability, decided to launch its own cryptocurrency.
Stablecoins give owners a safe place to store their assets whenever there are choppy waters in the crypto world. Consumers can quickly and easily convert from unpegged cryptocurrencies to stablecoins when they are worried about where the markets are heading next, eliminating the need to return to a fiat currency. These conversions can also be less expensive than when switching between crypto and fiat, as it takes the transaction fees of payment processing providers and banks out of the equation.
Some Biggest Stablecoins
Here are some best stablecoins in trend these days, according my expectation these stablecoins will be in top trends in 2020.
One Tether is one-to-one pegged to the U.S. dollar, and according to their website, it’s miles absolutely secured through the monetary reserve of the Tether platform. Most of the Tether tokens are issued on the Bitcoin blockchain via the Omni Layer protocol. Tether is one of the most famous cryptocurrency today.
GNG is backed by pound sterling (GBP), fiat asset backed cryptocurrency (GNG) is designed to leverage the new innovations of blockchain technology to improve the function of money, while being supported by traditional infrastructure that can insure it is trustworthy.
All coins will initially be issued on the Ethereum blockchain network so they exist as a cryptocurrency token. Each coin issued into circulation is backed in a one-to-one ratio (i.e. one GNG Coin is one GBP) by the corresponding fiat currency unit held in deposit by UK based Aglpay Limited. GNG Coin may be redeemable/exchangeable for the underlying fiat currency through their wallet app, if the holder prefers, the equivalent spot value in any other cryptocurrency. Once a GNG has been issued, it can be transferred, stored, spent, etc... just like bitcoins or any other cryptocurrency.
TrueUSD is subsidized by the U.S. dollar and represents the primary ERC-20 stabletoken built on the Ethereum blockchain. In essence, the TrueToken platform, which is at the back of TrueUSD, is designed to create tokens with the aid of fiat assets.
The project was launched at the very beginning of 2018 after raising $20 million. The company was supported by investors such as Stanford–StartX, Founders Fund Angel, FJ Labs and BlockTower Capital. Unlike other cryptocurrencies, TrueUSD has no upper limit on the issue of tokens, since the concept of its supply directly depends on the amount of dollars in storage.
Gemini Dollar (GUSD) was launched on Sept. 10, 2018. According to the developers, the Gemini Dollar is pegged to the U.S. dollar. Gemini Dollar is based at the Ethereum blockchain and uses the ERC-20 protocol. In terms of the technical component, it does not differ from other cryptocurrencies based on Ether (ETH).
At the launch of the project, neither an initial coin offering nor presale were carried out. The Gemini works on the basis of smart contracts that control the method of issuing tokens. The cryptocurrency is open-source and is to be available for anyone interested to verify. The same applies to smart contracts used in the system.
In 2012, the U.S. Securities and Exchange Commission registered the blockchain-based Paxos Trust Company, which had received a license from the regulator. One of the principle targets of the organisation was to create the blockchain platform for fund settlements.
In September 2018, the organisation introduced its native cryptocurrency, the Paxos Standard (PAX) stablecoin tied especially to the U.S. dollar. PAX can be exchanged for any other digital asset by way of using Paxos’s very own crypto exchange, itBit.
The cryptocurrency DAI is a stablecoin pegged to the U.S. dollar and was launched in 2017. This is the internal token of the MakerDAO platform, which maintains and stabilizes DAI’s price with a dynamic system of collateralized debt positions, autonomous remarks mechanisms and external actors having relevant interest.
According to their website, DAI is the primary decentralized stablecoin at the Ethereum blockchain. Using external market mechanisms and financial incentives, MakerDAO platform stabilizes the price of DAI at $1, while full control of the processes on Ethereum eliminates the need to trust centralized organizations and worry about external audits.
DAI’s emission scheme looks like this: The user sends a certain amount of Ether to the smart contract that issues the DAI tokens in return, which means that the newly created DAI tokens simply constitute a collateralized debt to MakerDAO.
What’s Next for Stablecoins?
Currently, out of the top 55 digital assets by market capitalization, five are stablecoins. In other words, almost ten percent of the largest cryptocurrencies are stablecoins. This is a testament to the demand for and the future potential of blockchain-powered stablecoins.
Whether stablecoins will be adopted as a popular online payment method, whether they will be used in fundraising or whether they will continue to be held primarily by investors to temporary store funds during market downturns will remain to be seen. What is clear, however, is that stablecoins is a growing market segment that we can expect to play a significant role in the future of cryptocurrencies.
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