“Stablecoins?”
Crypto, but money-like
On today’s episode of #WeWe aka Web3-Wednesdays, Stablecoins is the hot topic on ground 🔥 shall we?
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.
