‘Stablecoins’ are the most popular cryptocurrencies which have flooded the market. They are a class of cryptocurrencies that are true to their name. Bitcoin and other alt coins have deterred the institutional investors from entering the cryptocurrency market due to it’s volatility. The risk-averse investor would avoid such a market even if one is convinced of its code and security.
Stablecoins are pegged cryptocurrencies that have an equivalent amount of fiat currency or gold held in trust funds or other bank accounts. The ratio is 1:1 i.e. for a USD backed cryptocurrency, one coin would always be redeemed to get one US Dollars. There are many USD backed cryptocurrencies that have become popular in the recent times; Tether [USDT], Gemini Dollar [GUSD], USD Coin [USDC].
Advantages of a Stablecoin
Stablecoin value is pegged to a fiat currency, nonetheless, it is a cryptocurrency hence can be transferred seamlessly and also used as a store of value. Cryptocurrency wallets are safer than centralized bank accounts. Stablecoin is backed by reserve deposited in secure locations hence it gives guarantee of payment.
Stablecoins can be transferred between countries and later can be converted to stablecoins of their own currency, this system of decentralized transparent ledger money is envisioned to enhance global trade. Hence, due to reduced volatility it is a boon for countries with high inflation and an unstable Government.
The most popular and controversial stablecoin that has been in the market since 2014 is USDT or USD Tether. Until now it has served as a medium to hold value equal to the fiat money in cryptocurrency exchange wallet, without withdrawing the money in bank accounts. It is seldom used to transfer value as well. Recently, though, it lost trust among the market with rumors that the total reserve value of USDT was less than the number of tokens in circulation hence its price went down by 15% losing its 1:1 ratio with the US Dollars.
However, popular and wealthy trust funds have come forward with their versions of stablecoin like GUSD. Gemini USD, Gemini trust is run by the Winklevoss twins. USDC; USD Coin which is backed by Circle and is accepted by Coinbase. It is the first stablecoin to to be listed on Coinbase.
USD Coin (USDC) backed by Circle is the first Stablecoin to be listed on Coinbase! Click To Tweet
These cryptocurrencies employ popular economic and trade models, i.e. IOU issuance and Seigniorage share module which are coded in the smart contracts to retain the 1:1 peg to the particular physical asset. The smart contract will essentially be a decentralized bank that would peg the cryptocurrency according to the supply of real fiat money with the demand of the cryptocurrency and vice-versa.
The stablecoins are widely accepted and there are at least four popular versions of the USD and another was announced recently that is pegged to the AUD (Australian Dollar) built on the stellar blockchain. These cryptocurrencies are record the transactions in the blockchain, hence the ledger is transparent and efficient in recording keeping and transferring value.