The cryptocurrency market is highly volatile with cryptocurrencies like bitcoin and ether which sometimes undergo an increase or decline of 10-20% in one day according to the expert by blockchain and Sherman Lee.
To correct this volatility, stable currencies such as the tether have been created, which offer investors an option between traditional cryptocurrencies and legal currencies. The market stability of these currencies is due to the fact that they are linked to stable assets such as gold, oil or USD, as in the case of cables.
This means that stable coins not only use the underlying blockchain technology, decentralized network and a distributed ledger, but also have patrimonial support. Unlike cryptocurrencies, stable currencies are not based solely on utility and acceptance for their value.
"The additional traits that will help the broader adoption of any stable currency are simplicity along with the elegance of the concept, easy integration points for partners and the ability to exchange with which to work. Stability is key: short-term stability is important for transactions and long-term stability is important to the business. "Lee said.
The Issuance of Stable Coins
The value of a stable currency represents the property of a stable asset, which means that even if the market goes down, the currency will still be worth amount of the stable resource it represents. For example, 1 tether is equal to 1 USD, regardless of what happens to the encrypted market.
The most common way to execute a pegged asset is where an issuing authority offers a certain amount of coins for purchase with a "corresponding amount of the properties that have supported them have been archived for filing. . "
When investors want to exchange their stable currencies for the resource, they simply go to the issuing authority to do so.
The different types of stable coins
There are different types of stable currencies, ie fully guaranteed, partially guaranteed and unsecured.
For fully guaranteed currencies, the issuing authority requires to have reserves for equal or greater than the quantity of coins in circulation. An example of a fully guaranteed stable currency is the Tether (USDT).
With partially guaranteed currencies, the issuer holds 50% of the value of the coins in circulation while the issuing authority depends on "control of the token supply on the demand to be maintained"
Non-subordinated currencies are not supported by any good, but by expectation that they will retain a certain value
According to CCN, the authority / platform issues unsecured coins along with cryptographic bonds and cryptographic shares. used for contract supply, where "incentive users to spend their money in exchange for interest to bondholders".
The basis is a classic example of stable non-collateralised currency.
A professor of economics at the University of Berkeley, Barry Eichengreen, criticized the stable coins collateralized in The Guardian for the costly nature of the model to organizations that must preserve reserves of support.
On partially guaranteed stable coins, Eichengreen states that fear, uncertainty and doubt (FUD) could be disastrous for coins. In this situation, the issuer should repurchase the currencies with reserves to avoid a price fall. However, as reserves are limited, investors scramble to exit, which could "lead to the collapse of the peg".
Eichengreen also criticized the model of non-collateralized stable currencies because issuers can only "repair bonds when the platform grows, which is not guaranteed."
On the other hand, the issue more bonds could result in a free fall in the price of bonds, thus triggering the issuance of more bonds. According to CCN, this makes it difficult to meet the obligations of interest.
Some other examples of stable coins include MakerDAO, Havven, Basecoin, Carbon, Sweetbridge, Kowala, Satbly and BitShares. Tether is the largest stable currency that ranks eighth on CoinMarketCap based on its market capitalization.
Stable currencies are a good alternative for investors who want to safeguard their investments from frequent and extreme price fluctuations. These coins are a risk mitigation tool for traders and investors.