02 October, 2020 

Stablecoins And How Do They Work?

Digital currencies can undoubtedly solve the problem of asset decentralization and bring the financial system to a new level. But the need for stable assets equal to centralized ones, as practice shows, is necessary.
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Stablecoins And How Do They Work?

These are assets that are pegged to fiat currencies, in particular the US dollar. Such coins help users to insure against cryptocurrency volatility and play the role of a reliable medium of exchange. Stablecoins are an important part of DeFi that plays a key role in the modular ecosystem. According to CoinGecko, there are 19 stablecoins in public trade, of which the top 5 have a market capitalization of more than $ 5 billion. We propose to learn those stablecoins that are pegged to the main fiat world currency, namely the USD.

USDT  «Dollar Twin»

Tether (USDT) is pegged to $1 due to the full provision of reserves in the national currency: for each Tether token minted there is $1. Although Tether is the largest and most widely used dollar-denominated stablecoin with an average daily exchange turnover of about $ 30 billion as of January 2020, Tethers reserves are held by financial institutions.

Therefore, users have to trust Tether as an organization that it has the number of reserves it claims to have. Thus, Tether is a centralized stablecoin backed by the local currency. Based on its market capitalization, Tether dominates the stablecoin market, accounting for about 80% of the market.

Dai (DAI)  «Independent Coin?»

Dai (DAI) is backed by cryptocurrencies such as ether (ETH). The value of this coin is pegged to $1 through protocols that are governed by the voting of members of the decentralized autonomous organization and smart contracts.

DAI security can be easily verified by users at any time, indicating a decentralized asset system. In the context of market capitalization, DAI is a native stablecoin, also widely used in the DeFi ecosystem. Also, DAI used in stock trading, lending and other areas.

If we talk about the history of creation, it was launched not so long ago, namely in November 2019 and is also known as multi-collateral Dai (Multi-Collateral Dai). The Basic Attention Token (BAT) is now on the air, but other assets are planned to be added as collateral in the future. The creators say that by creating a DAI, you can send it anywhere. Some users send their DAIs to cryptocurrency exchanges, where everyone can easily buy a coin as well. It is easier to buy a DAI this way, as you do not need to block the collateral and do not have to worry about the security ratio and the stabilization fee.

Why Do You Need Stablecoins?

Many cryptocurrencies may be unusable or impractical to use and store. If you do not need to store currencies, and your earnings are spent mainly on household services, it is impossible to store it in such a volatile currency as Bitcoin. Also, the second psychological reason is the storage of Bitcoin, given the large growth of this coin in the future. After all, why use it in everyday shopping, if the point is in the future further growth and profits, respectively. Stablecoins are great for saving and are a reliable medium of exchange.

Also worth mentioning is that stablecoins are just cryptocurrencies with a stable price, so they have many of the most attractive features of other digital coins, namely the integration of smart contracts, efficiency, close to zero transaction costs and high settlement speed.

Read: What Are Synthetic Assets And How Do They Work?

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