The Stability of Stablecoins
January 8, 2023
With the collapse of speculative alt coins like those on FTX, it’s clear that not all cryptocurrencies are created equal. Are you interested in using cryptocurrency but worried about its volatility? Stablecoins may be the solution you’ve been looking for.
These digital currencies aim to balance the risks and uncertainties of other cryptocurrencies with the stability of traditional fiat currencies like the US dollar. This makes them a more secure option for people looking to use cryptocurrency but concerned about its value fluctuating.
There are three main types of stablecoins. The first is backed by traditional currencies or commodities like gold and silver. These stable coins are typically collateralized, meaning they are supported by a reserve or collateral managed by independent custodians. One such Stable Coin that Empowch uses, is the USDC (US Dollar Coin) which is pegged 1:1 with the USD at all times.
The second type of stablecoin is backed by other cryptocurrencies, which can be risky due to the volatility of these underlying assets. These stablecoins often require larger amounts of collateral to cover the issued coins. Examples include DAI, which is created in exchange for Ethereum as collateral.
The third type of stablecoin is non-collateralized, meaning it does not have any reserves or backing. Instead, it relies on a system similar to a central bank to maintain its value. BASECOIN is an example of this type of stable coin, using a consensus mechanism to manage the supply of tokens as needed.
So how do stablecoin transactions work? They use smart contracts, which are agreements written in computer code and stored on a decentralized network called the blockchain. The code controls the execution of the contract and ensures that transactions are trackable and irreversible. Smart contracts are digital agreements that are written into lines of computer code and stored on a decentralized, blockchain network. These contracts are self-executing, meaning that once certain conditions are met, the terms of the agreement are automatically carried out.
One example of a smart contract is the automatic payment of monthly rent. The landlord and tenant could agree to the terms of the rental agreement, including the monthly rent amount and due date, in a smart contract. Once the tenant has transferred the funds to the landlord on the agreed upon date, the contract would automatically execute and the funds would be released to the landlord. This eliminates the need for manual payment and tracking, and increases the efficiency and reliability of the rental process.
Smart contracts have the potential to streamline many different types of agreements and transactions, reducing the need for intermediaries and increasing trust between parties.
According to CoinMarketCap, the market capitalization of stablecoins exceeded $138 billion in 2022, making them a significant player in the world of cryptocurrency.
If you want to join the stablecoin revolution, consider using a platform like Empowch and be part of the future of digital currency.