What is stablecoins?

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Stablecoins are digital currencies designed to have a value linked to that of another currency, commodity, or financial instrument. They offer an alternative to the considerable volatility seen in popular cryptocurrencies like Bitcoin (BTC), making them more suitable for everyday transactions.

1. Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference.
2. Stablecoins are more useful than more-volatile cryptocurrencies as a medium of exchange.
3. Stablecoins may be pegged to a currency like the U.S. dollar or to the price of a commodity such as gold.
4. Stablecoins pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that are supposed to control supply.
5. Stablecoins continue to come under scrutiny by regulators, given the rapid growth of the $128 billion market and its potential to affect the broader financial system.

Why stablecoins?

The significance of stablecoins arises from the inherent volatility of Bitcoin, the leading cryptocurrency. Bitcoin's value experiences substantial fluctuations, exemplified by its increase from just under $5,000 in March 2020 to over $63,000 in April 2021, followed by a nearly 50% decline in the subsequent two months. Intraday movements are also erratic, with the cryptocurrency frequently witnessing fluctuations exceeding 10% within a few hours.
While such volatility may be advantageous for traders, it transforms routine transactions, like purchases, into precarious endeavors for both the buyer and seller. Individuals holding cryptocurrencies for long-term investment purposes aim to avoid situations where they unknowingly make exorbitant payments, reminiscent of the famous example of 10,000 Bitcoins exchanged for two pizzas. Simultaneously, merchants are reluctant to accept payments in a cryptocurrency that might depreciate significantly after the transaction.
For a currency to function effectively as a medium of exchange, especially when not recognized as legal tender, it must maintain a relatively stable value. This stability assures both the party making the payment and the recipient that the currency will preserve its purchasing power in the short term. In contrast to the crypto market's volatility, traditional fiat currencies experience relatively rare daily fluctuations of even 1% in forex trading.

Top 5 stablecoin

In my previous blog post, I had elaborated on Tether.

USDC

USD Coin (USDC) is a stable cryptocurrency pegged to the U.S. dollar at a 1:1 ratio. For each USDC on supported blockchain networks, the company holds cash or cash-equivalent assets equivalent to 1 U.S. dollar in its accounts. USDC is produced by Centre, an organization based in the United States that consistently undergoes audits to ensure regulatory compliance and reserve transparency.
USD Coin (USDC) Project
USDC is a stable cryptocurrency pegged 1:1 to the U.S. dollar, subjected to independent audits. As more goods and services are tokenized in the cryptocurrency space, smart contract platforms become fundamental to the exchange of value. In this context, USDC serves as an open-source and transparent stable cryptocurrency, allowing fiat currencies to interact with smart contracts, providing developers a convenient way to incorporate real-world currencies into blockchain applications. The USDC stablecoin is issued by the Centre organization, which holds full reserves equivalent to fiat currency in a 1:1 ratio and undergoes regular independent audits. Issuers are required to consistently report their USD reserve assets, and Grant Thornton LLP publishes monthly reports on these assets.

DAI

What is Dai (DAI)?
Dai is the world's first decentralized, collateral-backed stable cryptocurrency. DAI is an ERC-20 token that endeavors to maintain a 1:1 value peg to the U.S. dollar by locking up other crypto assets in smart contracts.
In contrast to other stablecoins issued and controlled by central authorities, DAI is the native token of the Maker Protocol, a decentralized and autonomous smart contract ecosystem operating on the Ethereum blockchain.
Collateralized loans provide a means for borrowers to lock up assets owned by the lender to obtain a loan. Traditionally, the interest rates on these loans are lower than unsecured loans, as the locked assets can be liquidated to partially repay the loan.
How Does Dai Work?
DAI is a significant component of the Collateralized Debt Positions (CDP) concept. CDPs are smart contracts within the Maker Protocol where users can lock up assets (such as ETH, BAT, etc.) as collateral and generate DAI.
CDPs can be thought of as secure vaults utilized to lock up collateral in a way that enables the acquisition of stable cryptocurrencies with high liquidity.
Due to the variable nature of the collateralized assets, DAI is typically over-collateralized to prevent liquidation. For instance, a user might need to deposit $200 worth of ETH to unlock $100 worth of DAI, creating a volatility buffer. In this way, if the price of ETH drops by 25%, the $100 DAI loan is safely covered by the remaining $150 worth of ETH.
To reclaim their collateralized assets, the user must repay the borrowed DAI along with an additional fee.

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Reference:

coindesk.com/learn/what-is-a-stablecoin/

USD Coin (USDC): Definition, How It Works in Currency, and Value (investopedia.com)

What Is DAI Coin? An Algorithmic Stablecoin | Gemini

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