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What is a Stablecoin and How Does it Differ from other Cryptocurrencies

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Many people are still skeptical if stablecoins like tether and the likes of it are actually stable. The high volatility nature of Bitcoin has led to the formation of stablecoins.

Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin. Basically,  a “stable coin” is a cryptocurrency pegged to another stable asset, like gold or the U.S. dollar.

Stablecoins work as a connection between the world of fiat and cryptocurrencies. Many companies make use of centralized authorities, which are supposed to support every coin with the one-to-one equivalent in Crypto or USD and controls the price volatility. Companies like Tether that offer this have been fraught with fraud and shady deals.

Stablecoins offer investors a fiat peg on a blockchain ledger with semi interoperable behaviour cross-chains. Since the transactions are verified on the blockchain, investors have complete transparency of their trades. The name stablecoins is somewhat a misconception for these currencies are subject to volatility when tokenized on the blockchain.

For example, in 2018 Tether, a peg to the US Dollar dropped to 85 cents. Understanding that volatility hinders mass adoption, Element Zero, a not-for-profit, created a next-generation payment network based on an algorithmic stablecoin creation platform.

Unlike the Facebook platform that is centralized with major volatility, Element Zero stablecoins are powered using the decentralized Stability Protocol and a new algorithmic method that removes the opportunity to sell Element Zero stablecoins below or above the set price to overcome inflation. The recently released Testnet has proven that they can truly achieve stability.

Element Zero, by providing a smart and open-source stablecoin payment solution, aims to transform our ideas about stability as we know it, offering a truly next-generation payment solution open to all.

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A stablecoin is a coin whose price doesn’t fluctuate. The most famous one is Tether, which is now surrounded by a recent scandal. It looks like Bitfinex didn’t have enough fiat currency to back tether up.

I am not sure that stable coins are a great idea. They are supposed to be a middle ground between cryptocurrencies and real currencies. But can a private organisation, without the backing of a government, guarantee stability?

Plus, why not just go for fiat currency directly. The supporters of stable coins have yet to come forward with convincing arguments in their favour, and the recent scandal doesn’t really help. (-Yasmin).

Nowadays, cryptocurrencies is often considered as rather unreliable assets due to the fact that within one day the digital currency rate may change drastically. The decision was simple at first glance: to create so-called stablecoins or that are not subject to price fluctuations and are tied to strong and reliable assets.

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It represents cryptocurrency which  price depends on the value of some traditional financial asset like the US dollar, oil, gold, etc.

The binding of the cryptocurrency rate to the price of such an asset is an attempt to adapt digital technologies to real life. This makes it possible to use Stablecoin as a means of payment in commodity-money relations, as it allows you to determine and compare prices for goods and services.

The very essence of Stablecoin gives such Cryptocurrencies a number of Significant Advantages:

1. The volatility of stablecoins is several orders of magnitude lower than other cryptocurrencies, since their price is directly dependent on the rate of the real asset. 2. The emergence of new opportunities in the development of cryptocurrency industry and digital assets.
3. Stablecoin has chance to become a global currency that does not depend on the rate of fiat currencies and which cannot be influenced by the actions of the government or the Central Bank.

Projects using Stablecoin:

1. TETHER (USDT) OR DIGITAL DOLLAR – a stablecoin issued on the Bitcoin blockchain with the value of the coin tied to the us dollar exchange rate.

2. DIGIX (DGX) OR DIGITAL GOLD – a stablecoin released on the Ethereum blockchain. 1 DGX token corresponds to 1 gram of gold, while there is a possibility of dividing the coin to the equivalent of 0.001 gram.

3. EL PETRO OR THE DIGITAL OIL – El Petro is the national cryptocurrency of Venezuela, issued on the nem blockchain. Its price is tied to oil – 100 million El Petro coins correspond to 5.3 billion barrels of crude oil.

Remember in 2017 when the price of Bitcoin went up from $1,000 to $10,000 and beyond? Bitcoin and other cryptocurrencies are highly volatile, losing or gaining value drastically on a daily basis. Naturally this see sawing in value does not inspire confidence in crypto as a means of payment or help to make cryptocurrencies widely acceptable.

Imagine you are in the process of selling a house but by the time the sale is complete, the cryptocurrency in which you were paid has lost 10 to 20 percent of its value (also imagine if it gained 10 to 20 percent in value). For cryptocurrencies to become mainstream and widely accepted, they need to be: simple, decentralized and stable.

This the solution of a stable coin. This is a type of cryptocurrency that has a stable value because it is pegged to another asset like gold, fiat currency or other cyrptocurrencies. Stable coins have a one for one ratio to what they are pegged to, e.g. Tether is a stable coin which is pegged to the US$ where 1 Tether = US$1.

An investor can therefore exchange 1 Tether for 1 US$. The implication is that for every Tether there should be the equivalent $ in a bank account controlled by a neutral 3rd party to back it. In the short-term daily transactions are convenient while in the long-term they enhance storage of value .i.e. a means of savings or insurance.

Stablecoins are the next stage in the evolution of cryptocurrencies and have the following advantages over other forms of cryptocurrency :

1. It gives investors safety [ to hold currencies in the long term because they wont loose vlaue so easily.
2. It makes daily transactions easy by eliminating the fluctuations that can take place.
3. Stable coins can lead to mass adoption of cryptocurrency.

Examples of stable coins include :

1. True USD Gemini Dollars [GUSD]
2. USD Coin [USDC]
3. Tether [USDT]

So, who is using Stable coins? 
Tether is a stable coin 100% backed by fiat currency held in a reserve account at a ratio of $1 to 1 Tether. This means that you can exchange your tether (subject to their T & C) for the equivalent US$

Libra is an upcoming project by Facebook that will use a stable coin for its full service payment network. The coin will be backed by a government currency, eliminating credit card fees and more importantly volatility. Even better is the plan to reward Facebook users with coins for viewing ads and making purchases, that’s something to look forward to. -(Eric Ongeri).

What is the difference between stable coin and cryptocurrency?

Cryptocurrency is a digital currency that uses encryption to regulate the currency and verify the transfer of funds. (Incidentally, such verification is made possible via blockchain technology, a digital ledger in which transactions made in a cryptocurrency like Bitcoin are recorded chronologically and publicly.)

Today, cryptocurrency is treated as a store of value,” not an everyday currency that can be used to pay for basic goods and services. Like gold or diamonds, the value of cryptocurrency is not its underlying utility, but how much people believe in it, something that has made cryptocurrency very volatile. “Stable coins,” by contrast, are tethered to actual fiat currency.

What makes a Stablecoin stable?

Because stable coins are tethered to fiat currency (vs. volatile crypto markets), they have the potential to smooth out crypto’s historic volatility. (The lack of regulations, from country to country, may be contributing to the volatility within the crypto market.)

Moreover, stable coins may help cryptocurrency go mainstream, enabling cross-border transactions — village to village, region to region, country to country — to occur with little to no interference, in more transparent, efficient and cost-effective ways. -(Mark Brinkerhoff ).

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Francisca Nwafor
Francisca Nwafor
Francisca Nwafor is the Founder of Coinratecap, a Digital Currency Portal. She is a Software Developer and Blockchain Enthusiast with many years of experience in the field of Information Technology. She is a Cryptocurrency Specialist and has written several articles about Blockchain and Digital Currencies.

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