“Stablecoins?”

Crypto, but money-like

Zainab Balogun O.
3 min readAug 30, 2023

On today’s episode of #WeWe aka Web3-Wednesdays, Stablecoins is the hot topic on ground 🔥 shall we?

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Intro.

Cryptocurrency is quite valuable, we probably already know that. 1 Bitcoin (BTC) is currently valued at about $26,000 approx. ₦23 Million.

This high value, however, comes at a cost & that cost is known as volatility.

Volatility is the instability of crypto. It’s the rise & fall, the zig-zag manner in which the value can go due to factors like market sentiment, lack of regulation, etc. 1 BTC is $26k now, but something could occur to make it rise to $30k next month, or fall to $10k, nobody knows for sure how it’ll be. I for one have no idea.

A couple of crypto people saw this volatility as a problem/opportunity & put heads together to create something called Stablecoins.

Stablecoins

Stablecoins are also digital currencies like regular crypto but their value is attached/pegged to a government-regulated currency typically the US Dollar ($$$).

It’s like the middle ground between crypto & fiat (regular money).

Stablecoins have some characteristics of crypto: Blockchain technology, the digital nature, the ability to use it in peer-to-peer transactions in decentralized finance (DeFi), global availability, etc.

It also has some characteristics of fiat money, i.e. regular government-issued money & the most important one is the fact that its price is stable.

Zero volatility.

Tether (USDT) is an example of a stablecoin & its price is pegged to that of the US Dollar $, hence, 1 USDT = 1 Dollar.

Its value is not affected by market sentiment & other factors that can cause a shift in price in regular crypto. And so, USDT doesn’t rise & fall or move in a zigzag manner like Bitcoin & its relatives.

Usefulness?

1. Global payments

Imagine a situation where I need to pay you $500 dollars for helping me write an article & I live in the US, you stay in… India. I can’t just send you $500 straight from my bank account.

There are things to consider; you don’t spend the same currency as I do & so your bank account does not primarily support US dollars. But then, let’s say you have a dollar account, The transaction speed would be slow due to currency conversion, bank charges, etc.

Headaches.

Stablecoins, like a superhero in time of need, can come through to solve this problem.

With a digital wallet, I can send 500 USDT & you’d receive the same amount in your own wallet within minutes depending on the timezone. All you need to do is then convert it to your local currency, & we’re good. Deal done 🤝

2. Protection

This protection is more for crypto traders who would want to keep their coins from volatility. In a case where Bitcoin has skyrocketed to say…$40k & the holder/owner doesn’t want to convert it to a local currency yet but at the same time still wants the money to stay on the blockchain, the $40k can be flipped to a stablecoin.

That way, it stays at $40k on the blockchain without the worry about the price crashing. Or vice versa.

3. Short-term investments

Because of its stability & reduced volatility unlike regular crypto, stablecoins are preferred for short-term investments on the blockchain.

Regular crypto e.g. Bitcoin is more ideal for long-term investments whereby the coin can be locked up for a long period of time with hopes of high gains at the end.

Stablecoins are useful for short-term deals or loans in DeFi where there’s little to worry about the value glitching & making losses.

Stablecoin Types

Not all stablecoins are pegged to the US Dollar $$ like USDT or USDC (USD Coin).

There are others that are:

  • Pegged to precious metals (Gold, Silver); E.g. Digix Gold (DGX), Tether Gold (XAUT).
  • Pegged to Crypto a.k.a Crypto-Collateralized Stablecoins; E.g. DAI (collateralized with Ethereum), sUSD (Synthetix USD, collateralized with Synthetix Network Token)
  • Algorithmic; These stablecoins use algorithms & smart contracts to control their supply & demand & maintain price stability without direct collateral. E.g. Ampleforth (AMPL), Terra (LUNA).

Wrapping up…

Every type of stablecoin has its advantages & challenges, & their mechanisms for maintaining price stability can vary significantly.

Users interested in stablecoins should understand the specific mechanisms behind each type & choose the one that aligns best with their needs/preferences.

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Zainab Balogun O.

advocate 4 humanity, quality TV shows & 💤. subscribe to my newsletter, some say it's fun https://zigzagzee.substack.com/