Since the first time I heard about Stablecoins I never got the urge to learn more about them. There was something about their inherent nature to stay stay stable which deeply turned me off. I always thought that crypto is something that has a plan to go the moon, why should I bother with something which will never go anywhere and is designed to stay at the same value FOREVER!!!
I also wondered why would anyone be interested in having a coin that is tied to fiat as most of the stablecoins are pegged to USD and it made no sense to me why should I buy them when they will always remain at the same value as the $ I will use to buy them.
This thought process changed recently when I read an article by MuyAsk on Maker and also saw that there were some DAI coins accumulated in my Publish0x account and I was wondering what exactly should I do with them. I finally decided to research a bit more about them and what I uncovered made me realized how badly I had misjudged stablecoins and I promised myself to never pass a judgement on another coin without understanding it properly first (sorry DAI, I mean it!).
Why do we need Stability?
If we go the mission statement of Bitcoin, it is to free the world from control of greedy bankers and create a decentralized utopia where everyone uses crypto for all their expenses. This is all good but we are all well aware of the wild fluctuations that all crypto suffer quite regularly. It will be of no surprise if any coin suddenly goes +/- 50% in a matter of days if not hours. We will just say, Well that’s how it rolls bro!
Think of it this way – you are living in a time where all your assets are crypto and everyone is only using crypto. Fiats have disappeard from the earth (how I wish to see that day, sigh!). Now imagine suddenly all your assets lose 50% of their value in a day (I am sure I know your reaction if it will rise 50%). For many people it will totally destroy their life, some may not be able to meet their basic expenses like food and rent.
To avoid this catastrophe stablecoins were created so you would maintain a balance between volatile coins and stablecoins.
Are all Stablecoins the same?
I initially thought all stablecoins are the same and will always be worth $1, however I realized that’s not the case and there are several different types of Stablecoins, with totally different structure.
They can be broadly classified into 3 broad categories:
- Fiat-Collateralized Coins
These coins are tightly pegged to a fiat which in most cases is USD. Some popular examples are USDC (Which stands for USD Coin, how innovative!) and Tether (though it’s a bit controversial but that’s another discussion). They always maintain a value of $1 no matter what’s happening in the crypto world.
- Crypto- Collateralized Coins
These coins are also aimed at being close to $1 but they have a crypto based collateral rather than fiat. Most common crypto being used as collateral is ETH. As they are not pegged to USD their value fluctuates a bit with the collateral value. Not too much though, just a bit. That’s why you see DAI moving in value between $0.9 to $1.1.
- Non-Collateralized Coins
These are the latest and more experimental stablecoins. They are not linked to any collateral and they have an algorithm in place which controls the supply of coins depending on how many people are buying it. More the demand more the supply. Some examples are Carbon and Basis but they are not very popular and last heard Basis was having major issues to get the coins finally launched.
I personally think Stablecoins serve another purpose, they can be used to replace the fiat in your account specially the one you are planning to invest in crypto in the future. This is certainly more meaningful in countries that are politically unstable and whose currency is at risk of being devalued (remember Zimbabwe).
When you want to book some profits from your crypto gains you can convert it to stablecoin on a DEX, rather than converting to fiat which will involve unnecessary commissions. You can hold this Stablecoin and invest it back into the sweet crypto once the market sees a dip.
I hope this helps to improve the perception you had about stablecoins, they really are not so useless.
STAY SAFE! From Coronavirus and from Crypto Whales!
Cheers,
SamBTC
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Originally posted on my blog at - https://cryptosensible.com/2020/05/21/stablecoins-why-were-they-created/
