The stable coins being the new narrative in the crypto market have been considered as the pot of gold. They have been introduced as the solution to the volatility aspect of the crypto market.
It is the segment of cryptocurrency that aims to achieve price stability being pegged to assets, fiat currencies, or reserves.
Why stable coins?
By the end of 2018, crypto became the major attraction as the new crypto product when there were 57 stable coins in the launching phase. This is where it was seen as the desirable option and gradually extended its application to overseas remittance.
The stable coins are bestowed with the following qualities which make them outshine in the cryptomarket by adhering to the market needs.
- Price Stability: With the introduction of stable coins the users are allowed to hold projects and stable coins in correspondence to the underlying value of the cryptocurrency. This aspect fetches huge price stability in the cryptomarket as, despite any depreciation in the value of the fiat currencies; their stability is assured up to a great extent.
- Privacy: The value of holding and identities of the users are not showcased or shared with anybody except the wallet holder. Thus, privacy norms are taken care of while trading on stable coins.
- Decentralisation: Since cryptocurrencies enjoy the freedom of decentralization at various levels this provides ease to users for trading.
- Ease for overseas trade: With the value of stable coins being at par ensures the ease of trading which benefits in avoiding high overseas remittance fees while sending them to the recipients. Trading through stable coins proves to be cheaper than the money transfer, which additionally reduces certain jurisdictions and swapping issues. At present (2020) the cross-border remittance fees are about 7% which is expected to drop to 3% by 2030 as per the World Bank’s study.
- Safety: The stable coins require no physical component for storage as they can be effectively stored in digital form (wallet) which eliminates the risk of theft or loss of the currency.
Types of Stable coin
The existence of stable coins can be analyzed by bifurcating in the following dimensions & structures:
- Algorithmic stable coins: These stable coins are programmed with code that is completely auditable, transparent, and decentralized. It is propelled by a certain demand and supply mechanism based on targeted software. These stable coins are backed by code programmed to channelize the circulation of coins in order to get the supply& demand on the same page. Lately, Tether is the most popular algorithmic stable coin.
- Fiat-collateralized Stable coins: These are stable coins pegged to fiat currencies and are backed by the unitary ratio (1; 1) which means to each stable coin there exists value attached with fiat currency. These stable coins can be exchanged through a provided bank account; the traders can directly redeem their amount from the exchange as per their convenience. These stable coins are much transparent and auditable thus require much trust in the trading operators. However, these stable coins are the simplest to deal upon yet they restrict the potential of cryptocurrencies as they act merely as the proxies of fiat currencies.
- Crypto-Collaterized Stable coins: Owing to the volatility, these stable coins as the name indicates are pegged to cryptocurrencies themselves. These are generally collateralized by the diversified cryptocurrencies reserve to ensure stability and shock endurance. The trading mechanism of this stable coin is entirely based on the blockchain which makes them transparent, decentralized, and are certainly backed by open-source codes. The Dai, which is created by Maker DAO is the most famous crypto-backed stable coin which is collateralized by the Ethereum.
- Commodity-collateralized Stable coins: The nature of these stable coins attracts the assets like gold, real estate, precious metals, oils, etc for the collateralization. These usually depict the value appreciation potential which is backed by the appreciated value of their collateral component. However, they are less liquid which makes it harder for the traders to redeem them frequently.
How are Stable coins used?
With the widespread popularity of the stable coins, their application is certain to expand and stretch to a great extend. Few of such uses of stable coins are illustrated below:
- The stable coins are popularly brought to use to switch against the volatile cryptocurrencies to safeguard the value of the holding. This allows the traders to reduce their risk to crypto-assets by being in the same ecosystem.
- The usage of a smart financial contract is allowed by stable coins which are enforceable over the stipulated time. The smart contracts eliminate the need for third-party requirements making it the self-executing mechanism on the blockchain network. These can be used for basic payments like salary, loan, rent, subscriptions, etc.
- With the crashing of local fiat currencies one can exchange their savings with fiat and commodity-backed stable coins.
USDT (Tether), TUS (True USD), PAX (PAXOS standard), DAI (Maker), GUSD (Gemini Dollar), EURS, SGDR are some of the most prominent stable coins backed as 1:1 largely by US Dollar, then with Euro and Singapore dollar.