Cryptocurrencies have been in the news for a decade, still, they are not a viable medium of exchange. According to Forbes, an optimal cryptocurrency should have four essential traits: Decentralization, Privacy, Scalability and Price stability.
The uncertainty of crypto prices is obstructing their mainstream adoption. That is, most cryptocurrencies can fall any day just because of market hearsay. Therefore, investors are willing to invest in cryptocurrencies but are unwilling to take the gigantic risk. Stablecoins address this problem. A stablecoin is a cryptocurrency whose value is pegged to a fiat currency or a commodity. An asset outside the crypto market stabilizes its price. Because of this, they can be a safer investment option.
Stablecoins aim to achieve both short and long term price stability. Crypto investors are keen to invest in stablecoin cryptocurrencies for different reasons: For example, active traders will go into a stablecoin to hedge from market volatility momentarily until a next investment opportunity appears. Let’s say you bought Bitcoin at a good price and you already made a 10% profit and want to exit your position. What do you do to not be exposed to market fluctuations? One solution would be to buy your favorite stablecoin with what you have in Bitcoin. The increasing market share and trading volume of stablecoins indicate growth and more considerable popularity.
Types of Stablecoin Cryptocurrencies
We can differentiate between stablecoins on the basis of the assets that back them up:
- TrueUSD, PAX, USDT & USDC: Stablecoins backed by US Dollars
- DAI, Synthetix: Stablecoins backed by cryptocurrencies
- Tiberius coin, Digix: Stablecoins backed by commodities
- Carbon, Kowala: Non-collateralized or seignorage type of stablecoins
Crypto community refers to fiat-backed stablecoins as a digital form of fiat currency. A stablecoin cryptocurrency backed by fiat currency works on a centralized stabilization model. So, a central authority like a bank acts as a custodian of the deposits. Stablecoins are pegged by fiat money in a ratio of 1:1. This means that the price of one stablecoin is equivalent to $1. If a stablecoin holder wishes to redeem cash in exchange then the cash is transferred to his bank account.
TrueUSD is a stablecoin whose value is pegged to US Dollar (One TrueUSD = $1). Multiple bank accounts of companies hold US Dollars that have signed an authentic escrow agreement. If an investor wishes to obtain TrueUSD online he has to undergo a KYC/AML check. After successful completion of the process, the investor can send USD to one of the trusted partners of TrueUSD.
Then, the trusted company verifies the funds. Their API instructs TrueUSD’s smart contract to issue tokens in a ratio of 1:1. After, these tokens are sent to the Ethereum address of the investor. The investor on receiving the TrueUSD tokens in his wallet can use them as a payment form, trade them or hold them. If he wishes to redeem them, he can send tokens back to the smart contract address. The trust company facilitates the exchange, an equivalent amount of TrueUSD price in dollars is sent to the investor’s bank account. Finally, you can store this stablecoin in TrueUSD wallets such as Digital Bitbox, Trezor ONE, Lumi and Eidoo.
TrueUSD combines the stability of fiat currency and the flexibility of a cryptocurrency. The periodic audit of bank accounts and multiple APIs provide a decentralized stabilization mechanism for TrueUSD. Moreover, TrueUSD has entered partnerships which allow investors to get a third party view of tokens in circulation and related collateralized fiat funds. Such real-time confirmation of funds will help traders and investors to monitor the value of tokens. They have a simplified and automated the redemption process.
Paxos standard token or PAX is another stablecoin whose value is pegged to USD in the ratio of 1:1. The New York State Department of Financial Services (NYSDFS) approves and regulates PAX. The customer has to initiate a purchase request in order to receive PAX tokens. The US government treasuries or insured US banks collateralize dollar deposits for PAX tokens. PAX is the first digital asset that a government regulated and approved. It also offers more trust to crypto investors and traders. You can use PAX token as a peer to peer payment form and you can trade it and even redeem it almost instantly on a 24/7 basis. All major exchanges list this ERC-20 token.
Tether (USDT) Stablecoin
USDT was one of the first stablecoins to reach a worldwide popularity. The idea of USDT was to infuse transparency and stability in the cryptocurrency dynamics. Like other fiat backed stablecoin, USDT price is pegged in 1:1 proportion to fiat currency. Most crypto traders use USDT as an investment instrument for bitcoin trading. The process to obtain USDT is quite simple. The buyer should create an account on the crypto exchange and deposit funds. You can exchange USDT for the amount of fiat currency that you deposit.
USDC is a regulated and verifiable ERC-20 stablecoin that works as global interoperable money. It aims to make international financial transactions as easy as sending an email. Some call it a blockchain based digital dollar. Additionally, USDC can be used as a programmable currency as well as to buy crypto collectibles. You can store USDC in hardware wallets (Ledger Nano S and Trezor), or wallets with SegWit feature (Coinnomi).
These stablecoins offer the benefits of cryptocurrencies: faster digital transactions, cryptographic security along with safe investment potential. They are paving the way for a better financial ecosystem by minimizing cryptocurrency market volatility. They provide liquidity to the cryptocurrency market and help in adoption of digital currencies on a global scale.
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