Stablecoins, secured and unsecured, are a new class of cryptocurrencies that attempts to offer price stability and are backed by a reserve asset. Stablecoins have gained traction as they attempt to offer the best of both world’s—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies. In most cases, most stablecoins are pegged to a widely used FIAT currencies such as the US Dollar or the Euro. Some are pegged to commodities, such as Gold.
What are stablecoins used for?
Stablecoins are one of the gateways that investors use to enter or exit the crypto world. Entering the crypto world is either through mining or buying one of the currencies on the market, and the best way to buy is through this type of currency.
As for the exit from the cryptocurrency market, it is either by selling your digital currencies, which is mostly done by converting them into stablecoins and then converting them into fiat currencies, or to buy commodities, whereas, one of the uses of stablecoins that you share with other currencies is that they can be used to buy and sell commodities that can be bought in digital currencies in general.
The importance of stable currencies lies at the time of crises, whereby if some people are interested in bargains at the time of bullish trend, where they achieve a quick profit, but everyone at the time of bearish trend, investors resort to stablecoins or that guarantee some stability.
What Are the best qualities of stablecoins?
Stablecoins are a relatively new type of stablecoins which don’t have a central operator but are governed by a consensus of the users who take part in the network. They have gained traction as they attempt to offer the best of both world’s—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
How to protect from volatility?
To link digital currencies to fiat currencies in order to protect against the fluctuations experienced by the first, there are three methods:
Using Fiat Currencies as collateral to stablecoins
The first way is by using Fiat currencies as collateral to stablecoins, which is a situation very similar to what happens in the world of fiat currencies pegged to a strong currency. For example, the Saudi riyal, the Qatari riyal, the Bahraini dinar, the Emirati dirham, the Kuwaiti dinar, and others, are all pegged to the American dollar, which protects them from fluctuations.
The collateral process comes as a guarantee for the issuance of the currency, and it could be using precious metals such as gold, which has been for years for a long time as a collateral for the issuance of cash, silver, or even some commodities such as oil. This method can be one of the factors that may help the central banks around the world to issue their own digital currencies, as it is considered a medium stage between anonymous cryptocurrencies and the known source currency.
In addition, most of central banks are in the process of using collaterals for cryptocurrencies’ issuance that are supervised by these banks, and the currency was often linked to gold. At this stage, there must be a way to hold the fiat currencies or commodities in which the digital currencies used as collateral, which is called the custodian, and therefore it must abide by regulating laws of custodians.
One of the most important functions of these custodians is that they contribute to granting confidence in the operations that take place on the stablecoins for which they were created, preserving the rights of investors and ending ownership transfer disputes. It also works to facilitate the process of monitoring the holdings of dollar-denominated companies issuing stable currencies or credit in the currency specified as a collateral of the digital currency, and therefore users guarantee their rights.
Second – using stablecoins as a collateral to a digital currency, which means the stablecoins are pegged to a digital or virtual currency that is higher in value. For example, when a high-value digital currency is pegged to a lower-value digital currency, in the event that the currency with the largest value falls, it will most likely not reach the price of the currency with the lowest value.
Third – the unsupported stablecoins, currency that operates according to specific systems that guarantee the stability of the quantities offered according to the value of the stablecoin. It is similar to the central banks’ systems, which control the supply of cash, according to the size of liquidity offered in the market.
Dollar Balance Problem
One of the problems that stablecoins faced was its ability to issue audit reports in which it can demonstrate that its balances are sufficient and complete to cover what a currency issued by tokens. However, in October 2018, PwC announced that it has entered into a partnership with Cred, a cryptocurrency company, to work towards greater transparency and confidence in the stablecoins space. PwC is a multinational firm and one of the world’s four largest accounting and auditing firms.
Cred is a decentralized global lending platform, and is a founding member of the UP Alliance made up of the Uphold digital platform, Blockchain at Berkeley and Brave Browser. The alliance offers digital assets globally via the Up Platform, while simultaneously managing US dollar-pegged stablecoins.
The Most Popular Stablecoins
Tether (USDT) is undoubtedly the predominant market leader when it comes to stablecoins. There has been debate over the audit reports and whether it has sufficient balance against all tokens issued. This was before Tether issued a statement to a well-known law firm showing that it had a balance in the bank in US dollars equivalent to its currency in circulation.
Another stable currency is the Gemini Dollar (GUSD), which is supported by Gemini, a cryptocurrency platform owned by the Winklevoss brothers (Cameron and Tyler Winklevoss). Coin USD (Circle) issued by Circle, and TUSD issued by TRUST Token. And the currency of Paxos Standard issued by the (Paxos) platform.