Stablecoins, a beginners friendly option in Crypto

Definition, benefits, and risks.

Cryptocurrencies’ volatility is not news, and it’s one of the main reasons why people think it’s a risky asset. This is also why people think we are a long way from crypto mass adoption, as the volatility will not allow for its usage as daily money.

In this context, Stablecoins play a critical role by providing the best of both worlds:

• they are cryptocurrencies built on blockchains, therefore holding the positive attributes that come with this.

• they possess price stability.

Due to this, Stablecoins contribute significantly to the adoption of cryptocurrencies as they are the most appropriate for daily use and for monetary exchange.

Now, the question is, how do Stablecoins stay stable?

Think of it like how currently governments and Central Banks maintain the value of their national currencies by holding Reserves in USD and other assets. Well, Stablecoins implement the same method. They are essentially cryptocurrencies that are pegged to another asset, in the majority of the cases to the US Dollar, and by doing so they can hold their value consistent to it.

These characteristics make them similar to what we are used to in how money and currencies work today, and therefore they are normally much easier to understand and be accepted by people.

Today, some of the largest cryptocurrencies in the world are Stablecoins. As I write this article, USDT (Tether) is the top 5 cryptocurrency by market cap, with a circulating supply of over $68 Billions!

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Let’s doubleclick in some key aspects of Stablecoins to get the full overview!

What are the kind of assets they are pegged to?

There are different types of Stablecoins, based on the asset behind:

• Fiat Currency: this is the most common asset class, with the vast majority utilizing the US Dollar as the underlying asset, such as USDT, USDC, TUSD, BUSD, GUSD, etc.

• Precious Metals: here the classic choice would be gold, such as PAXG (Paxos Gold).

• Cryptocurrencies: some Stablecoins are backed by other crypto assets.
  In order to avoid the volatility that these coins present, they are normally over-collateralized to ensure the price stays as stable as possible, which means they will have to hold in their possession a lot more of the underlying asset to ensure they can compensate for its volatility.

• Algorithms: Lastly, there are some Stablecoins that are not pegged to any assets. Instead, they utilize algorithms to balance supply and demand, and hence providing the stability in their prices, which is very similar to what Central Banks do.
  These are typically decentralized Stablecoins, meaning there is no company or intermediary that needs to hold X amount of USD to back the Stablecoins pricing ratio.

What are some of the main benefits and use cases of Stablecoins?

• Digital Money: the fact that its pricing remains the same enables Stablecoins to play a bigger role in mass adoption and allowing people to leverage it as digital money of everyday use.

• Fast and Secure Transactions: Given the global, digital, and secured attributes enabled by cryptography, Stablecoins are a great choice for sending and receiving money globally.

• Lower Fees: when doing so, crypto offers lower fees compared to traditional options.

• Earning Interest: Stablecoins are great for earning some passive income. For example, you can gain access to crypto-specific high APY by staking it (click here to learn more about Staking).
  In a nutshell, think of it as a fixed deposit in a saving account, but with a much higher interest rate than what traditional financial institutions will offer.

• Transparency because it’s built on a blockchain, everyone can have access and view the transactions.

ACCESS: This is a really important one to me. Many people can’t access foreign currency like the USD, such as in my home country Argentina, and therefore experiencing high inflation. With crypto and Stablecoins, people have a way to access a more stable currency, with less inflation and volatility.

What are some of the key risks and/or controversies?

I previously mentioned that Stablecoins offer the best of both worlds. But in a way, it can be considered a double-edged sword: by offering the best of both worlds, it also risks having the worst of both worlds.

Let me explain myself a bit more. In the majority of the cases, Stablecoins are backed by USD, and the ratio is 1:1, meaning the value of 1 Tether (or USDC, TUSD, etc) equals 1 USD. Now, in order to maintain this, you will have to trust that the companies behind these Stablecoins do in fact own enough amount of Dollars that allow them to maintain that value.

Therefore, there are 2 points to be made here:

1. Trusting an intermediary is exactly the kind of centralization crypto tries to avoid.

2. Money loses value, so if a Stablecoin is pegged to USD in a 1:1 ratio, and the US Dollar depreciates, then as a consequence, such Stablecoin will also lose value with it.

Having said all of this, it is important to note that there are periodical audits that are conducted to prove these companies really do hold the necessary underlying asset they are linked to. Different Stablecoins will have different frequencies and levels of strictness in these audits, so it’s always highly recommended to do some reading if you decide to invest your money in a particular coin.

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I personally believe that Stablecoin offers a great opportunity for people.

In general, for anyone new to this space that would like to experiment, understand the benefits of crypto without being exposed to higher risks and volatility, Stablecoins is a recommended starting point.

By combining it with Staking (click here to learn more), you will be giving yourself a significant advantage over traditional options!