All About Stablecoins In Plain Language

All About Stablecoins In Plain Language

In the XXI century, the financial world has experienced many revolutions: payment cards are being introduced everywhere; people pay with phones and watches using NFC; cryptocurrency and blockchain have experienced unprecedented growth and popularity. And if everything is evident with the first two points — these are parts of payment banking systems, then the cryptocurrency has caused and causes many questions. Experts say this tool will soon replace the world’s currency and normal economic relations, but so far, this is unlikely. An unstable system, which can change the exchange rate by 20% in a day (and it is not always an increase), cannot be used for daily money exchanges between individuals. And the stablecoin was created to reduce the instability of the currency.

What is stablecoin

Stablecoins are digital money with a fixed exchange rate (1% variation). How to achieve this? Fix the exchange rate with the help of real-world stable currencies or raw materials, such as dollars, gold, or oil. 

This invention helps connect cryptocurrency with the economic world, where you need to pay with counterparties. A business with a conventional digital currency would lose tens of thousands of dollars just in a single transaction; at the end of the transaction, the coins’ actual value differs many times due to fluctuations in the exchange rate. There are no such problems with stablecoin.

How does stablecoin work

As mentioned earlier, stablecoin is associated with money or raw materials. They have a fixed price created with the help of the country’s national bank — of course, on a long time scale, inflation or exchange rate jumps are visible, but they are much smaller and longer than those of the cryptocurrency. 

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So, what stablecoins depend on, and how this dependence is regulated.

Relationship with the fiat currency

The most popular type of stablecoin, where the cryptocurrency is linked to an actual monetary unit (dollar, for example). It gives some centralization to the coin since the bank keeps a certain amount in reserve and issues the same number of tokens in a 1:1 ratio.

Relationship with the crypto

The difference here is that cryptocurrency acts as digital collateral in the form of smart contracts. One party blocks the coins in the contract, then gives a certain amount to the other party in the form of collateral. Then it goes back to the same warranty for a reverse exchange. There is a trusting relationship, but given that all participants are interested in stability, the currency is kept at the same level.

Relationship with algorithms and smart contracts

As soon as the price falls below a specific indicator, the algorithm blocks or reduces the issue of tokens. The same happens when the price goes up: to lower the cost, more tokens are issued. Sometimes this type of stablecoin has reserve collateral to maintain positions in the market.

With the help of such technologies, the blockchain is approaching real life. If earlier cryptocurrency was a tool for investing and trading, now there is every chance to use the system in the usual commodity-money relations.

Why and who needs stablecoins

The contrast between cryptocurrency and conventional money is palpable. We are not afraid that one day the price of bread will rise by 60%, just because someone has a few million dollars and plays with the exchange rate. 

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And even if everything isn’t as simple in the blockchain as in the game, yet the fact remains — instability. Why would a person buy a loom mill with bitcoins now if it will be possible to buy a whole sewing shop in six months? It is for the needs of ordinary monetary exchange with excellent currency stability that stablecoin was invented.

Another advantage is the ability to use tokens by anyone who may be interested in it. With the development of technology, more and more people will stop being afraid of the crypto and buy tokens like bonds or stocks.

Also, the coins are still independent enough to be called a cryptocurrency. Although potentially experts call this one of the threats to the crypto world, they don’t depend on the state.

Dollars and bitcoin coins

List of the best stablecoins in 2021

At the moment, there are many stablecoins, so the question arises which of them is better to invest in. We decided to highlight the best stablecoins in 2021:

  1. Palladium Coin: based on the connection with the precious metal palladium. It is possible to buy a small amount — anonymously and quickly.

  2. DAI: pegged to the dollar, it allows you to pay for everything compatible with the Ethereum platform. It has been a stable coin for several years, proving that it isn’t a risky investment.

  3. EOSDT: built on a token generation system, choosing what it will be based on (currency, raw materials, metals). Then you can use it to exchange or create assets.

  4. Tether: the oldest and most popular stablecoin of all of the above. It is based on the tokens’ movement between exchanges and the extraction of benefits from the price difference.

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It is only a tiny part of the stablecoins, but the most popular and used. However, it is worth noting that popularity doesn’t mean that other options are worse or unstable. It’s just that these are the so-called oldies who have established themselves in the market.  

Stablecoins: is it worth it?

In 2017-2018, many were outraged by the enormous jumps in cryptocurrency exchanges and their volatility. Even a simple investment was risky; there is nothing to say about buying and selling. But the world is changing, and so is technology. Stablecoin allows balancing the market, attracting new investors to the blockchain, and entering the real world without losing anonymity and decentralization.

Having a lot of experience in the blockchain, Technorely can say that stablecoin is a significant step for the money world. With it, the ecosystem of the entire technology will develop and attract new users. Cryptocurrency is becoming more accessible and easier for the average user every day. And who knows, maybe soon the whole world will switch to cryptocurrency.

We, the Technorely team, are engaged in software development and blockchain. It means that we specialize in blockchain development, security token offerings, and the IEO process. We are ready to help you with the implementation of a project of any complexity.

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