What is Stablecoin? Everything You Must Need To Know!

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Blockchain brought us a wonderful gift along with all of its mesmerizing aspects – Cryptocurrencies. Cryptocurrencies have been aiming for the top place in the investment world for a long time. However, despite all its features and attempts, it still struggles to cope with the real world scenario.

Firstly, cryptocurrencies are extremely volatile, and the prices never stabilize. For this reason, many users are moving away from this new crypto marketplace. Experts believe that cryptocurrencies have a long way ahead if it wants to become a globally accepted currency.

Well, we can already see how it’s turning out, in this year, 2018, they hit their all-time best $800 billion. But as the days went by, the situation changes drastically. The price started to reduce very fast, and after some time now it’s on the $200 billion-zone.

Enter Stablecoin.

The stable coin is the new hotshot town, and they are looking really good. Many of you must have heard about it, but remain confused about what it actually is. That’s why this guide will cover everything related to stablecoins. So, let’s start!

 

Table of Contents

Chapter-1: What Is A Stablecoin?
Chapter-2: Different Types of Stablecoins
Chapter-3: Stablecoin: Most Popular Projects
Chapter-4: What Are the Real World Applications?
Chapter-5: Why Is The Popularity of Stablecoin Increasing?
Chapter-6: Are There Limitations?
Chapter-7: Looking Forward

 

Chapter-1: What Is A Stablecoin?

Stablecoin is a type of cryptocurrency that always holds a stable price. These type of cryptocurrencies are created to take on the unstable crypto market scenario and ensure a stable ground for all.

Thus, Stable Coin cryptocurrency is crucial for crypto investors, cryptocurrency exchanges and the overall crypto market. As an example, take Tether stablecoin for instance. Tether is backed up by fiat money, and you can trade Tether for $1 only. So, you see how Tether stablecoin can actually balance the unstable nature of the cryptocurrencies.

what is stablecoin and stablecoin types

You will find many stablecoins on the exchange nowadays. These coins are slowly gaining popularity and reestablishing people’s faith in digital currencies. Although there have been other projects that couldn’t reach the required success level as popular ones, still they are going strong.

Even though you might think why there are so many projects of the stable coin when all of them have the same output. Well, the thing is, every single stable token has their own set of mechanisms. Some of them have different protocols or utilize various methods to stabilize the value.

Almost all the stablecoins hold up some form of collateral and then manage their supply to influence the marketplace and make it stable. Money backed stable token holds actual money in reserve and then ensure a redeemable currency in exchange for tokens.

The original algorithms behind every coin might seem a bit complicated, but the simple term would be “Holding a stable value in any case.”

 

Why Stablecoin Exist?

Well, it’s quite simple really. Dealing or circulating with fiat money isn’t always an easy task in the cryptocurrency world. Mainly because of the so-called restrictions and regulations on fiat money.

This is why many cryptocurrency exchanges don’t deal with dollars. Thus, it becomes quite difficult for investors who want to invest in cryptocurrencies with hard cash. The stable coin can be a solid substitute for dollars, and it will help you out to invest in other cryptocurrencies.

The theory is to mimic the nature of dollars and using that to sell bitcoins and get cash. This is how stablecoins work.

Crypto marketplace also lacks liquidity. Stable coins list, on the other hand, can provide the liquidity that the crypto marketplace need. This is why they are essential for the overall digital currency growth and worldwide involvement.

 

Chapter-2: Different Types of Stablecoins

You might think all the stablecoin cryptocurrency has the same type of algorithms. However, that’s not the real case here. You will find a different type of stable coins list in the market with different mechanisms. These are typically categorized into four different coins.

Let’s see what they are:

1. Fiat-Backed Stablecoin

These are backed up by fiat money and one of the common forms of stable coin crypto. In simple term, it’s somewhat a digital form of fiat money.

Fiat money is the existing currency we have of each country. In simple terms, it’s the paper money you use every day to buy things and save up in your banks. USD, CHF, EUR, JPY, and GBP are just a few handfuls of example, but you get the point, right?

What happens in this form of stablecoin cryptocurrency is that these coins have the same value as of regular currency. This means, if your currency is $1 then each stable coin crypto will have the same value $1. So, both of these currency ratios will always stay at 1:1. This is the basic element of stablecoin.

However, in this case, all these types of stablecoins will have real money backing them up from the banks. This infrastructure makes the overall concept of decentralization somewhat invalid. Why? Because ultimately the cryptocurrencies are being controlled by the banks, which is a centralized system.

Yet, this type of stable coin structure is also quite simple; still, you would have to deal with trust issues.

The Process

Processing this type of stable token is quite simple. A third party company will manage the flow of the fiat money and the tokens. It will accept new fiat money and then issue the exact amount of stablecoin on the network. This company will be in custody of all the fiat money that the token is representing.

But you would have to trust the third party company and believe that banks have the same amount of fiat money. However, you really have no way of knowing that for sure. It’s a matter of trust, which brings out the common problem all over again.

After they issue the tokens and you buy stablecoin with fiat money you can use on various platforms. On the other hand, if you want to sell your tokens and get the cash back, the company would wire transfer you the money. After that, they will destroy the tokens you redeemed. In this way, they will maintain the same ratio of 1:1, even if people buy some tokens or destroy them. This is another way how stablecoins work.

So, you see you do get a stable value in this type of stable coin crypto.

 

Does It Have Any Advantages?

  • Fairly Stable: Fiat currencies are quite stable as they have the government backing them up. Also, you will be able to have legal rights as this stablecoin deals with legal terms.
  • Quite Simple: You will be able to understand the mechanisms quite easily. Also, it’s a straightforward algorithm, no complex situations or whatsoever.

 

Major Drawbacks

  • Centralized System: The structure of this stable coin is centralized, and you know how vulnerable it can be. The basic requirement of blockchain which is getting rid of centralization issues doesn’t work here. So, you can’t call these networks decentralized or distributed.
  • Trust Issues: You would have to trust them blindly. But this element goes strictly against the nature of cryptocurrencies. External audits could be required for validating all the accounts.
  • Rules: As you deal with fiat money passively, you would be obliged with rules and regulations. This something many of us doesn’t really want.

2. Commodity-Backed Stablecoin

This type of coins is backed up commodities such as Gas, Gold, Valuable Metals, etc. Here, all these commodities will always have a stable value on the network. You can place products in fungible assets as you can trade them for hard cash on the same market.

Many of you may have commodities stored for rainy days. A most common one of them is gold, a precious metal with a great value in the market. Gold is a rare metal and people have been using it as an accessory for generations.

That’s why you’ll always find demand for this metal and other precious metals on the market. So, it will always be tradable.

Other precious metals also have demands but not as high as gold itself. Investors stock up this metal and consider this as a safe option regards to other metals.

Stablecoin that is backed up by gold will always have a specific value assigned to each of the coins. For example, one gold stablecoin could represent one gram of gold. However, you might wonder where is the physical gold itself. These golds are kept in a highly secured trusted vault, but in most cases, they are the third party.

So, your stable coin crypto company would use third-party services for giving you this kind of luxury item. You might want to consider it before jumping on board with these coins.

Commodity-backed stable coin crypto isn’t as popular as fiat-backed ones. But you do get an alternative option if you don’t want to invest in fiat currencies. It’s kind of like a tangible option for you.

The Process

This isn’t as simple as fiat-backed stable coins list. A user would buy gold or another form of the commodity through the platform. After that, the vendor will provide the gold that the user just bought and the custodian will preserve this in a safe vault.

Once, the vendor stores the gold, everything they did is placed on any form of a digital card. This card is necessary because in case of any mismanagement the user or vendor can claim their processions based on the information.

This digital card gets sent to a smart contract on the network, and that contract then mints new gold stablecoin or token on the net. The users then get the tokens they claimed for in the start. This is more of a complicated way how stablecoins work.

There isn’t that much stable coins list, backed up by commodities nowadays. However, the few projects are giving users a bit more option other than fiat-backed ones, so that’s a plus point.

On the other hand, there have been reports about scam commodity-backed stable coins list projects, so make sure they are authentic before investing.

 

Does It Have Any Advantages?

  • Real Asset: Any investor here can hold real assets as a digital form. As you can see the assets are tangible. So, you can redeem them at any time using the conversion rate and own the asset itself.
  • Higher Stability: The value of commodities don’t really fluctuate that much. So, you can think of them as a stable source of investing. In the long run, these types of stablecoins will definitely come in handy
  • Offers Liquidity: A unique approach to tokenize commodities is making the blockchain platform more liquid than before. It will facilitate a greater span of price discovery too.

 

What about the Disadvantages?

  • Too Many Authorities: This type of stable coin requires a lot of extra authorities such as the vendors, custodians, and other authorities. That’s why in the end, it kind of becomes a centralized system rather than a decentralized one, which increases the risk of failure.
  • Requires Audit: Making sure that everything is on point will require audit sessions. This consumes a lot of time and undermines the overall blockchain experience.

 

3. Cryptocurrency-Backed Stablecoin

Cryptocurrencies back up this type of stable token. Popular cryptocurrencies such as Ethereum or Bitcoin, which happens to have a lot of market value are used here. Usually, these coins aren’t backed up by single crypto, rather a mix of different cryptocurrencies. This structure prevents any volatility risks.

If you use only single crypto to back up this stablecoin price, then the primary goal of stablecoin becomes void. It would just be a coin backed up by another coin, which makes this unnecessary, to begin with.

However, if this stablecoin price is backed up a mixture of cryptocurrencies then even if one of the cryptocurrency has a massive price fall, other currencies can back up that fall. This system does work and ensures a stable value for the tokens.

Cryptocurrencies are greatly volatile assets, so investing in only single one is highly risky.

Another great factor of cryptocurrency-backed stablecoins is that it is overly collateralized. This type of structure is necessary to maintain the value fluctuations of the crypto market. Making more than the situation demands prevents the damage of sudden crash in price.

A most common scene for these types of stablecoins is when users stake their coins in a smart contract and then later creates a fixed ratio of stablecoins.

The Process

In this one, the user will lock their base cryptocurrencies and then based on that the stablecoin will get created. After the creation, all of them would be sent to the users’ wallet. Even in many cases, you would see that this category of stablecoin price will let users get a loan from the smart contract.

They will lock up the collateral and use that to pay off any kind of debt if the value of stablecoin price decreases somehow. The user would set a withdrawer level and if a sudden crash happens and it comes close to that level, the collateral will automatically liquidate.

Other methods, such as supplementary or incentives further ensure the steadiness of price of the stablecoin. So, all doesn’t solely depend on the group of cryptocurrencies but rather a combination of everything. This is another way how stablecoins work.

 

Are There Any Advantages?

  • Decentralized System: Unlike other stablecoins, this one has a more decentralized scheme of all. So, if you are fond of the decentralized architecture, then you could consider it.
  • Higher Efficiency: You can quickly transform any kind of crypto to another crypto on the network. It’s relatively easy to do, and it increases the liquidation process.
  • Transparency: All transactions are recorded on the ledger system, so you’ll be able to see everything that’s happening.
  • Creates Leverage: As the coins are over-collateralized, any user can use it as a means of trading, which ensures an efficient process.

 

What about the Disadvantages?

  • Unstable: As these types of stablecoins are backed by cryptocurrencies itself, its common sense that it would be more volatile than other types of stable coin.
  • Too Complex: The minting process is a bit complex and depends on so many factors. If even one of them is missing, then the whole process would collapse.
  • Instant Liquidifying: It can both be a blessing and curse. As you know that you can liquidity your assets if it falls below the threshold value. But in doing so, the price range could drastically shift, making the whole system volatile.

 

4. Seignorage-Style/Non-collateralized Stablecoin

This category of coins is a bit different. They don’t have any assets to back them up; rather they use an algorithm to burn or add crypto to stabilize the value. This coin uses a governed approach that ensures the expanding or limiting of coins on the network. The system ensures that the tokens always have a stable value.

If the demand increases, new coins get minted, and it stabilizes the price hike. However, the primary target always remains the same, make the value as close to $1. Unfortunately, this type of stablecoin didn’t gain as much popularity as the others.

But the situation is changing as this type can change the prospects of the stablecoin price.

The Process

It’s as simple as I said earlier. The user on the network demands for stable coin and the system will generate coins to sustain the demands and stopping the price hike. But what happens when the prices drop because of too many coins?

In that case, the network will offer shares and to buy stocks you will need the stablecoin. So, this way they get rid of excess stablecoins and maintain the system. This is kind of a similar strategy that the banks use nowadays.

 

What Are The Advantages?

  • Fully Decentralized: As everything gets monitored by the algorithms, the network is fully decentralized without any third party influence.
  • No Backup Assets: This stable token doesn’t have any kind of collaterals backing it up. So, you would never have to worry about price fluctuations of the collateral affecting the system.
  • Really Stable: It’s comparatively more stable than other types of stablecoins. The algorithms will always make sure that there is never too many or too few coins on the network.

 

Are There Any Disadvantages?

Complex Process: Even though the algorithms take care of everything, the process is utterly sophisticated. Making sure that the minting and destroying coin ratio always balances each other out, is exceptionally difficult.

 

Chapter-3: Stablecoin: Most Popular Projects

There have been many stablecoin projects so far. Not that every single one them gained popularity, but some projects are really worth mentioning. Let’s see what these projects are.

 

Fiat-Backed Stablecoin Projects:

  • Tether (USDT)

Let’s start off with one of the reputable stablecoins on the market. Tether is a stable coin backed up by USD. Moreover, it’s massively popular among the blockchain enthusiasts. Tether Limited is the company that owns Tether, but it’s not the only thing they own. One of the largest exchange Bitfinex does have a closer link to Tether stablecoin; they both seem to have the same CEO.

This stablecoin price is mainly used by crypto investors, whenever they need to avoid a possible downfall of the market. So, you could think this as a savior of some sort. Most traders bought Tether as a valuable and stable investment.

What Tether does here is that it provides a better solution to direct USD conversion. Here, traders can convert all their investments into a stablecoin that represents an equivalent amount of USD. So, you won’t need to cash out in crisis anymore.

 

Disagreements Regarding Tether

Even though Tether might seem like the perfect catch, there are some controversies in the market. First of all, many question the lack of transparency in the network. As fiat-backed stablecoin has a centralized architecture, this questioning is inevitable.

Many fear that Tether stablecoin might not back up all the tokens with the exact amount of fiat money. On the other hand, Tether always claims that they have enough USD to convert all tokens. Many critics did challenge this claim, however, couldn’t find any solid ground for their theory.

In the end, Tether is still popular with more than $2 billion market capital.

 

  • TrueUSD (TUSD)

 

TrueUSD is another fiat-backed stable coin, but it’s an alternative for Tether. You will get more transparency in this coin, unlike Tether. Their core framework allows them to maintain this transparency.

Their system has some fluent significance with the escrow system. Every user on their platform can exchange TUSD with USD using that escrow account. This account is untouchable for the team, and no one can manipulate that. Obviously, this scenario will ensure a better user experience as you will always be able to get 1:1 ration for your token.

Bittrex first introduced TrueUSD and later other big crypto marketplace like CoinTiger, Binance and Upbit welcomed it. As far as the popularity goes, it’s on the second position, tight after Tether. However, the team is trying to adapt this new stablecoin to other sectors such as international payment or e-commerce solution.

 

  • Gemini (GUSD)

Gemini dollar or GUSD came into the market with high expectations. The Winklevoss twins – Cameron and Tyler are behind this new type of fiat-backed stablecoin.

Gemini dollar follows all the regulations of typical fiat money, as it’s backed up by USD. The company claims to be the first regulated coin on the market at present with lots of features. One of the notable ones might be the ability to send and receive USD on their platform.

So, it ensures a fast and secure payment system that goes head to head with USD.

How Does It Work?

At first, anyone interested in buying Gemini will convert USD to GUSD from the Gemini exchange. These tokens will go straight to his/her Ethereum account. On the other hand, if he/she deposits this amount to their Gemini dollar account, then they can convert it back to USD.

The USD issued for these tokens are saved up in a U.S.A bank, where they will be eligible for transferring and other applications. To make sure they have full transparency, the company works with an independent accounting firm that inspects the 1:1 ratio every month.

This way, you won’t have to worry about your Gemini dollar when you invest in it.

 

Commodity-Backed Stablecoin Projects:

  • Digix Gold Tokens (DGX)

One of the best stablecoins projects for a commodity-backed coin would be Digix Gold. This ERC-20 token is backed by a demanding commodity – Gold. There are lots of users out there who want to invest in Gold and Digix brings that opportunity right to their doors.

Every single gold is audited and then stored in an extremely guarded vault known as “The Safe House.” You can redeem DGX any time you like; there are no restrictions whatsoever. The value of every token will depend on the market price of Gold. Gold was always considered a stable asset regarding investing along with fiat money.

So, in this regard, DGX is just a perfect example of the commodity-backed stable coin. On the network, if you wish to invest in Gold, you will get 1 gram of gold for each DGX token.

If you are worried about transparency, then DGX can definitely get rid of your worries. Every 3-months they provide a fully audited statement that ensures the safety of your asset.

 

  • Tiberius Coin

With the launch of Tiberius Coin, Tiberius Group AG. Started their journey with blockchain. Tiberius Group AG is an asset management and commodity trading firm that wants to give investors another option to buy stablecoin.

However, they are relatively new, just launched on Oct 1, 2018. Tiberius coin is somewhat a unique new stablecoin cryptocurrency that is backed up by rare metals.

One of this coin will represent seven types of metals. So, this stablecoin cryptocurrency isn’t backed by only a single rare metal but a combination of them. They have a precise ratio of metal for every coin. Mostly the token has 6.569% platinum, 11.057% cobalt, 19.595% gold, 13.269% nickel, 15.838% tin, 24.959% copper, and 8.713% aluminum.

Regarding weight, you’ll get 0.0015g platinum, 1g cobalt, 0.003g gold, 6g nickel, 5g tin, 25g copper, and 25g aluminum.

According to them, they want people to invest in industrial metals which has high demand and will persist for a very long time.

Unlike others, Tiberius coin is sold legally under the jurisdiction of the Swiss law. This stablecoin will only cost you $0.70, and it’s made sure to keep it at that price range.

 

Cryptocurrency-Backed Stablecoin Projects:

  • MakerDAO (DAI)

MakerDAO falls under the cryptocurrency-backed best stablecoins, but with a bit of difference. As I said earlier that, cryptocurrencies are highly volatile and this type should always have a mix of crypto to stable each other out.

However, that’s not the case in MakerDAO. They have two types of token one is MKR, and another is DAI stablecoin. The DAI stablecoin is backed by Ethereum. Yes, only Ethereum. But how do they maintain the stability then?

As you know, this type of coin sometimes over-collateralizes. So, if you want a $20 worth of stable coin in the network, you would have to peg $40 worth of Ethereum for them. Once you peg the Ethereum, the network will use a smart contract and start minting the DAI gold stablecoin and send it to your wallet.

The essential part about this coin is that you’ll get a fully decentralized system as DAI stablecoin doesn’t work with any kind of centralizing unit or third party.

 

  • Synthetix (Havven)

Synthetix, previously known as Havven, is a decentralized payment system. Havven, started its journey pegged to offer the same value as the USD and launched a stable coin named nUSD (now sUSD).

The primary goal is to provide a greater solution for cryptocurrencies price fluctuations and offer a decentralized path. But how do you mint the coin? Well, for this you’ll have to buy their token knows as SNX (Previously HAV). Their very own token backs up this another token, and they make sure that the supply always remains stable.

However, after the rebranding, Synthetix introduced many more stablecoins such as sEUR, sJPY, sAUD, sKRW, and sXAU. These coins are also backed by SNX. So, to have them you need to use SNX coins, and then your choice of the stable coin will be minted.

It’s quite fascinating actually because, with Synthetix, you get a lot of choices and a lot of currency. As mostly stablecoins are pegged to USD, here you get other currencies as well including gold stablecoin.

 

Seignorage-Style/Non-collateralized Stablecoin Projects:

  • Carbon

It’s another best stablecoins example of non-collateralized stablecoin. Carbon stablecoin aims toward the future of distributed ledger technology, and they think stablecoins will be the next asset for the global economy.

Carbon stablecoin follows the stable value of USD, using algorithms to stabilize the overall token supply. They have two types of tokens on the network – Carbon Stablecoin and Carbon Credits. The carbon credit is a volatile token and is used to maintain the price of carbon stablecoin or CUSD.

Once the prices start to drop the algorithms auctions off their carbon credit to users who want to participate in burning their CUSD. After they have enough CUSD, the algorithm burns them off, which creates an upward price pressure.

If somehow the price starts to rise then the network distributes CUSD to the carbon credit holders and stabilizes the supply. The system works, and you get a decentralized nature without anything backing it up.

So, in a way Carbon is using a volatile asset to stabilize another asset. Their algorithm is quite simple, and they believe it can go on for a very long time without disturbing the network in any way.

 

  • Kowala

The non-collateralized stablecoin Kowala is one of the best stablecoins to invest in if you are into this type of cryptocurrencies. kUSD is the official coin of Kowala, and it follows the pricing of USD. kUSD claims to be the first automatically backed up stable coin and runs of Kowala protocol.

This protocol has the same outcome as Basis. The Kowala protocol creates and destroys kUSD based on the demands. If the demand becomes high, then they create more kUSD, and if it drops down, then it destroys the tokens.

If they can keep it going, then Kowala just might become an everyday usable stablecoin. With this you will be able to conduct numerous activities like – online shopping, paying bills, hospital fees and many more.

 

Chapter-4: What Are the Real World Applications?

Stablecoin comes with their fair share of applications and in real life scenarios those works perfectly.

 

stablecoins applications and projects

Let’s see what they are:

  • Everyday Currency

You can use stablecoins as an ordinary currency just like fiat money with legal backups. They will be just like digital money, and you can use them to make online payments. Now you may finally be able to use only your mobile and pay for that morning coffee with a cryptocurrency.

You can also use it as a payment method for overseas payments, and now you won’t have to go through the conversion process at all.

  • P2P Payments and Streamlining recurring

Making peer to peer payments is easier with stablecoins. You can use them on smart contracts to make automated payments. Coupling with smart contracts anything can be done. If you run a company, you can pay your officers with crypto just using smart contracts.

Everything will be automated and transparent. With this coin, you will be able to pay up the same amount as they earn. With banks out from the equation, this could take just minutes. So, it works best for both of the parties.

  • Affordable and Extremely Fast Remittances

Many people of developing countries go to another country in search for work. This is a relatively growing niche in the work field. They have families to support back at home, and for that, they need to send money overseas. Sending remittances overseas is much simpler with these coins. They are extremely fast and will have the same value as fiat money. So, regular businesses of using other agencies won’t be needed.

Not only it will be done within minutes, but the transactions costs in stablecoins are much lower. This is how they can save up additional money.

  • Added Level of Security from Currency Crashes

As they are stable, you won’t have to worry about currency crashes while investing. Unlike other cryptocurrencies, the values almost don’t have any fluctuation. Regarding any crashes, people can quickly exchange their money for a stable coin to preserve the amount.

And when everything calms down, they can easily get their money back without any hassles. This ensures better protection from any sort of currency crashes. Usage of this coin can ensure the stabilization of regular fiat money as well.

  • More Stable Cryptocurrency Exchanges

Cryptocurrency exchanges have to deal with a lot of instability. As regular cryptos have limited supply, the demand for them slowly increases making them highly volatile. This is making a negative impact on the minds of investors.

Crypto marketplace also has to deal with fiat money conversion regulations and many more. But with stablecoin, the tables can be turned. Stabilizing the market these coins can improve the overall cryptocurrency exchanges: no added risk, no unnecessary regulations.

 

Chapter-5: Why Is The Popularity of Stable Coin Increasing?

It’s quite obvious why stablecoins are becoming a popular choice. Stablecoin isn’t like other cryptocurrencies. Usual cryptocurrencies have fixed or limited supply with schedules to release new coins. On the other hand, this coin works rather differently. Instead of having a limited supply, they regulate the supply based on the market situation. So, they have a distributing architecture for the cryptocurrency economy, and they stabilize the market.

While you may think how it grows in demand as investors won’t be able to profit much with their stable prices, yes, that’s true, but these open up another kind of opportunity for startups and rainy-day investors.

If you want to have a backup for rainy days or in terms of need, then what can be the best way other than to buy stablecoin? Stablecoins will always give you back the same amount you invested initially, and you won’t have to worry about the prices dropping.

Another significant fact is that, as we are moving forward a digital world, all currencies will eventually be digitalized. In that case, having stable coin as the main payment source would work similarly as we use fiat money.

And this is why stablecoins are the latest popular buzz in the market.

 

Chapter-6: Are There Limitations?

Stablecoins do look great as a system, but every system comes with their fair share of flaws. Let’s find out what are the main limitations of these coins.

  • Centralized

Stablecoins have a centralized nature, which goes against the primary nature of blockchain. This goes perfectly with the fiat-backed ones. Fiat-backed coins always have to work with a single entity or a third party. That’s why the architecture becomes widely centralized.

Tether is a fiat-backed stable coin, and it can’t provide the actual decentralization of blockchain. So, even though, it uses blockchain, you aren’t getting the same level of experience.

  • Trust Issues

As they have centralized nature, people can’t fully trust the system. They still need to prove their applications. Fiat-backed or commodity-backed coins have this type of limitations. They both claim that they have enough money or commodity to back up the tokens, but how will the users really know that.

Most of the cases, users are unsure whether they are being deceived or not. This problem is easily solved through regular audits. However, not every single stable coin is up for that.

Another fact is that, if you want to get the real commodity someday, it could mean an expensive trip to the vault or other paperwork you don’t want to do.

  • Regulations

Another limitation of typical fiat-backed currencies. This stable coin uses real money to back it up, so most of the coins have the same regulations as the fiat money. So, this ultimately clashes with the purpose of cryptocurrencies.

Cryptocurrencies don’t have regulations or don’t fall under the radar. That’s why it’s easier to liquidate them. However, with the law in the mix, you will obviously face the same level of rules as you do with fiat money. This discourages many investors to buy stablecoin.

  • Unstable

Crypto-backed or commodity-backed stablecoins could become unstable due to crashes in pricing. It’s still unclear how they will back up if the values of assets drop in the real world. Yes, they do pose a lot of advantages, but they are underestimating the real-life scenarios.

What happens if the commodity price drops to a great extent or the cryptocurrencies become too unstable? There’s no way of knowing how they will manage the coins to be “Stable” under adverse circumstances.

 

Chapter-7: Looking Forward

Even though you know cryptocurrencies for a long time but they are still in the infant stage. This goes for stable coin as well. These coins are fairly new to the game and still have a lot of flaws to fix.

However, at first glance, they do look a lot promising and they could change the usual scenario of the crypto world. Every form of the stable coin has different setting and designs; none are perfect. Maybe if they can pull off this new type of architecture in the long run, people will start to accept the blockchain and cryptocurrencies positively.

Stablecoins can grow globally, and it’s still early to comment on their success.

*Disclaimer:  The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Do your own research!


About Author

Just is a born geek who loves tweaking his computer and gadgets for effectiveness and productivity. He seems to have a greater interest in blockchains, which makes him perfect for sharing his new discoveries on 101 Blockchains.

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