Stablecoins (part 1/2)

What is a stablecoin?

  • Since they are stable by being linked to the US dollar for example, they vary very little in value
  • They can be used in trades like any other crypto asset
  • They allow traders to temporarily park their profits after selling a crypto asset before moving on to their next trade
  • During so-called bear cycles, “hodlers” can park their gains made during a previous bull run, waiting for the right moment to jump back in the game for the next bull run
  • Some stablecoins can be transferred quickly between custodians: Essential for trading when wanting to arb between DEXs and/or CEX
  • Much easier to integrate the use of stablecoins on crypto trading platforms than fiat money
  • Collateralized to a real word reserve of assets (example: USD locked away in a bank). Can be fiat, mixed with other corporate assets.
  • Collateralized to other cryptocurrencies. A stablecoin issuer allows users to lend their crypto assets as collateral and can borrow the minted stablecoin in return
  • Algorithmic stablecoin: Not collateralized, but using a mint and burn mechanism to regulate supply to keep the coin’s value in line with a target price (one of the possible parameters to keep price in check). When the price goes down, a part of the circulating supply is burned to reduce supply and thus creating artificially more scarcity (and so raises the demand, which raises the price). When the price goes up, new tokensare minted to raise the supply and reduce scarcity pressure. That’s similar to a non crypto market where the prices of goods are regulated by supply and demand.

Popular stablecoins

  • Launched in 2014, one of the oldest and the most popular
  • Collateralized by a mix of non crypto assets
  • Market cap: $69,710,372,338
  • Launched in 2018, second most popular
  • Collateralized by a mix of non crypto assets, like USDT
  • Market cap: $31,213,922,883
  • Launched in 2015 on the Ethereum blockchain
  • Collateralized to other cryptocurrencies
  • Market cap: $6,201,086,651
  • Launched in 2020 on the Terra blockchain
  • Algorithmic stablecoin
  • Market cap: $2,673,859,989

Potential drawbacks associated with stablecoins

Difference between USDC — USDC.e

Terminology

  • Minting a token/coin means generating the token/coin once certain operations are executed (via smart contract interaction). Equivalent to printing a bank note
  • Burning a token/coin: Destroying it/taking it out of circulation. Equivalent to destroying a bank note.

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