What are Stablecoin: The Complete Guide For Beginners

Stablecoins
Stablecoin

Stablecoin is the new set of digital currency gaining traction in the cryptocurrency ecosystem. To tackle the wild volatility of the cryptocurrency market and achieving mainstream adoption, the rise of stablecoin has exploded. The term stable coin may seem new to many investors, crypto traders, and blockchain enthusiast, this guide, however, attempt to introduce you to the concept of stablecoin and how they work

What Are Stablecoin

Stablecoins as the name suggests, are cryptocurrencies that attempt to provide price stability.  Stablecoin is different from the conventional digital currencies like bitcoin, ethereum. They are designed to minimize price volatility, they do not have limited supply and are pegged to a price-stable asset like USD, gold, oil, which serves as a collateral. Cryptocurrencies are known to be subjected to high volatility, for instance, bitcoin, which is the number one digital currency in the world, in January 2017 experienced an exponential growth in its price from $970 to $13,800 in December 2017 and then declined to trade around $6,350 at the end of June 2018. This kind of extreme volatility makes it an impossible task for cryptocurrency to become a medium of everyday transaction. But with stablecoin in place, the purchasing power of cryptocurrency can be guaranteed and will encourage spending.

Types of Stablecoin

Stablecoin can be divided into three main stability working mechanism

Fiat-Backed Stablecoin

Fiat pegged stablecoin are the most popular ones in the cryptocurrency market. They are pegged with a fiat currency often times the U.S Dollar which is subjected to regular audits, ensuring they adhere to the necessary compliance.

However, this mechanism questions the point of decentralization which is the whole essence of cryptocurrency. Fiat collateralised stablecoin can be seen as a centralized approach because it requires a central authority that will hold the reserve assets as collateral.

For example Tether (USDT) which is the most popular stablecoin uses this approach and has been subject to different controversy with issues relating to their auditors. Some examples of fiat collateralised stablecoin include Tether (USDT), USDC, and GUSD they all backed with a 1:1 to US dollar.

 Crypto-Backed Stablecoin

These are cryptocurrencies collaterised with another crypto coin which serves as a stablecoin to the other. In this case, the cryptocurrency acting as the stablecoin will have a large number of its coins kept in reserve for issuing a lower number of the stablecoin.

In October 2018, cryptocurrency startup BitGo announced a new crypto-collateralised stablecoin, an ethereum based ERC20 token known as Wrapped Bitcoin (WBTC) backed 1:1 with bitcoin.  In this case, bitcoin is the stablecoin and will act as collateral to the Wrapped Bitcoin (WBTC) token.

A move according to BitGo CTO, Benedict Chan will bring the stability and value of bitcoin to ethereum expansive ecosystem of decentralized applications.

Non-Backed Stablecoin

The working mechanism of non collaterised stablecoin is different from the first two types of stablecoin discussed. Non collaterised are not backed with any price-stable asset like US dollar, gold but they are designed in such a way that they hold a stable value. This type of stablecoin makes use of an algorithm to control the supply of the coin depending on the price. It’s a similar method used by central banks to control the demand and supply of their national currency in order to maintain its stability in the market. Example of non collaterised stable coin includes Carbon, Basis formerly known as basecoin.

The State Of Stablecoin

The ethereum blockchain is the most widely used platform for stablecoin. These account for 60% of the stablecoin in the market. Other platform used include bitcoin and stellar

According to research conducted by Blockchain Luxembourg, there are 57 stablecoin, with 66% of them backed by fiat collateralised assets such as U.S. Dollar, commodities like gold and 34% pegged to other forms of collateral. The market capitalization of stablecoin in the cryptocurrency market is over $3 billion; Tether account for over 90% of the trading volume and market value of stablecoin making it the most actively traded cryptocurrency after bitcoin.

Bottom Line

No doubt 2018 have been the year of stablecoin; this new class of cryptocurrency may pose as a direct competition in the future to fiat currencies and may weigh on the price of coins like bitcoin who is viewed as a store of value and medium of exchange. The rise of stablecoin can be viewed as a move to bridge the gap between fiat currency and cryptocurrency. Bringing the needed liquidity to the market.  For digital currencies like bitcoin to achieve mainstream adoption, stablecoin adoption can be the answer to this problem.

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Passionate about the fintech space in Africa, blockchain enthusiast, cryptourrency advocate, freelance writer, open to learning new innovations #InnovateAfrica

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