Stablecoins: Cryptos with fixed prices?

It was time to talk seriously to you about stablecoins. These cryptocurrencies have fixed prices. Yes, yes, you read correctly, at fixed prices. Stablecoins are a new type of cryptocurrency whose value is often linked to another asset considered stable.

These stablecoins can be pegged to fiat currencies such as the US dollar, other cryptocurrencies, precious metals, or a combination of all three.

Being pegged to a fiat currency (Fiat like the Euro or Dollars) seems to be the most popular option on the market at the moment. 😎 Basically, to quickly summarize, 1 stablcoin would be equivalent to 1 dollar.

Some of the most well-known stablecoins include Tether (USDT), TrueUSD (TUSD), Gemini Dollar (GUSD) and Coinbase (USDC). The demand for purchasing stablecoins continues to grow.

Fight against the volatility of cryptocurrency prices….

Most cryptocurrency values or prices are determined by the law of supply and demand. This is also why cryptocurrencies are exchanged and negotiated freely on exchange platforms. It is therefore according to the sellers and buyers of a cryptocurrency that the price is determined.

Prices fluctuate depending on whether supply or demand prevails. It is the market which determines the price and the investor has no power over it.

If the price rises, he rejoices and if the price falls, he trembles...

This pricing freedom, combined with the speculative nature of determining the price of a new asset class, makes cryptocurrency a very volatile asset class.

It is moreover this precise point which pushes certain people away invest in bitcoin or in other cryptocurrencies. They are simply afraid of market volatility and of risking losing – in the event of a drop in price – their investment.

In fact, it's completely understandable. Myself when I started, I had difficulty crossing the threshold of investment because I was naturally afraid of losing everything or losing a good part….Then, I invested anyway because the possibility of doubling or tripling my capital was just as possible...And that's what happened.

In fact, when we decide to invest in cryptocurrencies, it is because we are convinced that the price will rise.

It is precisely to avoid the risk of losing the value of one's capital that players in the cryptosphere decided to create a solution that would not be subject to market volatilities.

This is why and this is how stablecoins appeared, which bear the very evocative name “stable”. These are so-called stable cryptocurrencies. Yes, just the name is already reassuring!

What is special about Stablecoins?

Stablecoins are cryptocurrency tokens whose price remains stable (usually fixed to a fiat currency such as USD).

These tokens are used by traders on exchanges to store stable fiat currency in the form of liquid cryptocurrency on exchanges.

This therefore allows many people who want to invest in cryptocurrencies to do so more easily because there is no risk of devaluation of the cryptocurrency.

😎 Indeed, the stablecoin is always fixed on a fiat currency. This means that if you buy a stablecoin for an amount equivalent to $100. No matter what happens in the market, your stablecoin amount will always be worth $100.

Why are stablecoins so interesting?

Cryptocurrencies are a fantastic technology that returns freedom and financial sovereignty to the individual. Each person becomes their own bank and this newfound freedom alone explains the great interest in cryptocurrencies.

However, to date, they are still too volatile to be used effectively as stable, non-speculative prices, loans, or other stores of value.

In fact, the world of crypto-holders is divided into two: those who invest and keep while waiting for the price to rise in the future. And, those who brilliantly take advantage of volatility and even make profits with it: traders of course!

But, apart from these two types of people, there are the reluctant and the afraid. So this is why stablecoins are so important because they are a great tool for everyone, including the most skeptical.

Stablecoins allow us to consider the good parts of cryptocurrency (programmability, elusiveness, decentralization) without volatility.

This means, for example, that we will tend to prefer to buy an expensive item with stablecoins, such as real estate or cars. For what? For the simple reason of remaining aligned with the market price…

Beyond these purchases, there are of course areas where stablecoins prove to be extremely useful.

This is for example the case for taxes. Imagine; If you sell your cryptocurrency at a higher price, then this is a taxable event because there was a profit. This arguably also applies to stablecoins, but this argument becomes a little trickier because the rates are fixed.

How Stablecoins Work?

To understand how a stablecoin works, you still need to know how they are created. So here is a short chapter to tell you about the internal workings of stablecoins.

There are 3 ways to develop a so-called stablecoin cryptocurrency:

Guaranteed by fiat currency
Crypto-collateralized
Algorithmic (scam!)

1. Stablecoins with Fiat collateral

This is certainly the least complicated stablecoin system to implement. It's quite easy to understand. If you deposit an amount of fiat currency (e.g. US Dollar, EUR) to a third party, they will then issue/create a stablecoin unit equal to the amount of fiat currency you deposited.

Stablecoins are designed to combat the volatility inherent in cryptocurrency prices. They are normally collateralized, meaning that the total number of circulating coins in circulation is backed by assets held in reserve. Simply put, if there is $500 worth of pegged coins in circulation, there should be at least $000 sitting in a bank. That's collateral.

For withdrawals, the third party uses the same amount of stablecoin units for each fiat currency unit you withdraw. Examples of fiat-backed structures include Tether, TrueUSD, USDC, GUSD, and PAX.

Advantages:

Easy to grasp and conceptualize.
The value or price will definitely correspond to USD or other fiat currency.

The inconvenients:

Trusting a third party to hold your fiat collateral.
Another third party is needed to verify and verify that the number of Stablecoins issued matches the number of deposits.
Third-party audits are often slower and more expensive.

The success of collateralized stablecoins relies on third parties. A third party must therefore be truly transparent, because it is responsible for custody, issuance and verification.

This was the case, for example, with Tether.to, which became the subject of controversy as the number of USDT tokens increased considerably and audit reports ceased to be published.

2. Collaterals with cryptocurrencies

Crypto-collateralized stablecoins are a much more interesting project but more complex to understand. Tokens work in almost the same way, but behind the scenes they are much more complex in operation. Here, it's not just about keeping a US dollar in a bank account.

Cryptocurrency-backed assets rely on the overcollateralization of cryptocurrencies…Not very understandable, eh? In fact, the 2 main examples are done using transparent smart contracts on the blockchain, which eliminates the need for third parties and keeps the stablecoin relatively decentralized.

The problem with this method, however, is that cryptocurrency is a very volatile asset, again.

To reduce high risk and have some security against major drops in cryptocurrency prices, collateral ratios are higher than your typical loan-to-margin ratio. Crypto-collateralized stablecoin offerings typically have a 2:1 ratio, sometimes even higher to account for volatility. Two known examples of stablecoins are the Bitshares Smart Assets' (bitUSD, bitCNY) and MakerDAO (ERC20 DAI token.)

Advantages:

Eliminates the need for a third party. No need to trust a third party and rely on another to carry out an audit.
Issuing and creating stablecoins is much faster, cheaper, and has better liquidity due to the ability to transact back-to-back.

The inconvenients:

A complex selection process; questionable price stability/security if it is only one cryptocurrency.

3. Decentralized Stablecoins

Decentralized stablecoins have paved the way for everyday stablecoin adoption. Many crypto enthusiasts, especially the older ones among us, have become accustomed to the volatility of cryptocurrencies. But, for new users, it can be very complicated to get started in a market that is so “unstable”.

In a volatile market, this means nothing other than your coffee that you bought for 0,0012 BTC one day, could be worth more than 0,03 BTC a year later. I'm taking extreme figures but if you know the story of the guy who bought a pizza for 1 bitcoin would have bought it today for 10000 euros...

Stablecoins are therefore an excellent solution for those who do not want to deal with volatility. Fast, easy, and inexpensive P2P payments, denominated in a familiar currency, are a much easier way to get acquainted with the cryptocurrency space, as opposed to the complex, slow, and expensive transactions of other cryptocurrencies….

Basically, you understand, if you are “afraid” of investing in cryptocurrencies because of their volatility…It would then be good to consider investing in stablecoins.

Know for example that Coinbase released its stablecoin: USD Coin (USDC).

There you go, I hope this article has helped you see things more clearly. Please note that I am preparing a future article to discuss the validity of stablecoins.

This is not investment advice. Always do your own research before investing.