STABLECOIN
Learn everything about them.
What is a stablecoin ?
A stablecoin is a cryptocurrency backed by an asset or a debt in order to protect its value. Even if volatility is often sought after by crypto investors for quick gains, it may become problematic when it is time to secure them.
That’s why stablecoins came to solve this problem, the first one in circulation was Realcoin, a USD-backed token mostly known under its actual name, “Tether”.
As the company hasn’t been able to show full proof of dollar reserve and because of the general lack of transparency, it became highly controversial, leading to the creation of many different alternatives.
Why use stablecoin ?
Stablecoins can be used in many different ways, the main usage is to secure profit from a crypto investment or to trade and increase your portfolio during a trend.
They are useful in the ecosystem as they are favored by crypto-related companies, the tokens are quickly available while you need several days to make a bank transfer.
Using stablecoins is also a fiscal advantage* in many countries who don’t apply taxes on “crypto to crypto” trades yet.
A Gold backed token is also a way to diversify your portfolio with a safe asset you can use when the whole crypto-market is going down.
Finally, contrary to fiat currency, stablecoins are available for unbanked areas allowing them to access financial tools without approval from a financial institution.
*Depends on your country of residency and citizenship.
What are the different types of stablecoin ?
Fiat backed
Similar to the Tether token, these stablecoins are issued by companies in charge of the reserve of fiat currencies to guarantee the value of the token. Contrary to Tether, most of the companies are able to provide transparent audits of their reserves. Most of the fiat-backed stablecoins are backed by the US dollar, a minority of non-USD fiat backed tokens such GBP, EUR, CAD, AUS are on the market.
Crypto backed
These stablecoins are generally decentralized and don’t have any fiat currency in reserve to guarantee the value of the token. Instead a crypto asset is used to preserve the value of the digital currency. To prevent volatility of the collateral going under the token’s value, it is over collateralized in a smart-contract, if the value of the collateral reaches the value of the stablecoin, it is automatically sold to maintain the price of the circulating token.
Algorithmic
These stablecoins do not have any collateral to maintain the price, instead they use algorithms to guarantee its value. Usually, this type of stablecoin has difficulties to maintain value over a long period of time and high fluctuations on the price may occur.
Asset backed
This last category represents the stablecoin backed by an asset or a basket of assets or commodities to maintain the price stability of the token. The VeraOne token is an asset backed stablecoin on the ethereum blockchain as each issued token is backed by one gram of physical gold stored in highly secured vaults. The VRO token value is always equal to one gram of gold.
Which is the best stablecoin to choose ?
Fiat backed stablecoin
Fiat-backed stablecoins are useful to switch quickly between two coins who don’t share a trading pair on cryptocurrency exchanges, however they should be avoided by crypto investors in every other situation. Using these tokens expose you to an important counterpart risk, not only when you don’t have full proof of reserve like Tether but also with transparent companies.
Intergovernmental agencies often said that cryptocurrencies are not a threat to the financial system but fiat stablecoins could be one. They are tolerated for now but most countries are building their Central Bank Digital Currencies (CBDCs) which could lead to a global ban of fiat backed stablecoins.
Crypto backed stablecoin
Crypto-backed tokens are a better alternative to this last one, as they are decentralized it makes them censorship-resistant. Because they are generally indexed to dollars, you’re still exposed to the risk of the underlying currency. If you’re a non-US investor you should worry about how the dollar impacts your investments in your local currency.
Algorithmic stablecoin
The algorithmic stablecoins are interesting experiments but they usually fail in their main role : being stable, even if some achieve to maintain their price during some time, some price variation can happen from 10% daily up to 50% on a midterm period. Considering this information, it’s better to use these tokens as risky speculative assets rather than a safe reserve.
Asset backed stablecoin
Whatever the reason you all have a better option than fiat backed tokens, with asset backed tokens, and especially gold backed stablecoins such as VeraOne. You have a better stability over time than fiat currencies, the trust in a millennium asset that can’t be “printed” out to an unlimited supply, and a full transparency of the reserve regularly audited.
Fiat backed stablecoin
Fiat-backed stablecoins are useful to switch quickly between two coins who don’t share a trading pair on cryptocurrency exchanges, however they should be avoided by crypto investors in every other situation. Using these tokens expose you to an important counterpart risk, not only when you don’t have full proof of reserve like Tether but also with transparent companies.
Intergovernmental agencies often said that cryptocurrencies are not a threat to the financial system but fiat stablecoins could be one. They are tolerated for now but most countries are building their Central Bank Digital Currencies (CBDCs) which could lead to a global ban of fiat backed stablecoins.
Crypto backed stablecoin
Crypto-backed tokens are a better alternative to this last one, as they are decentralized it makes them censorship-resistant. Because they are generally indexed to dollars, you’re still exposed to the risk of the underlying currency. If you’re a non-US investor you should worry about how the dollar impacts your investments in your local currency.
Algorithmic stablecoin
The algorithmic stablecoins are interesting experiments but they usually fail in their main role : being stable, even if some achieve to maintain their price during some time, some price variation can happen from 10% daily up to 50% on a midterm period. Considering this information, it’s better to use these tokens as risky speculative assets rather than a safe reserve.
Asset backed stablecoin
Whatever the reason you all have a better option than fiat backed tokens, with asset backed tokens, and especially gold backed stablecoins such as VeraOne. You have a better stability over time than fiat currencies, the trust in a millennium asset that can’t be “printed” out to an unlimited supply, and a full transparency of the reserve regularly audited.
