Stable Coin

Such actions are similar to those of central banks printing banknotes to maintain the valuation of fiat currency. It is often achieved by implementing a sensible contract on a decentralized platform that will run in an autonomous manner.

A stable coin  is a new class of cryptocurrency that seeks to provide price stability and is backed by a reserve asset. Stable coins have received traction as they try to provide the first-rate of each world—the immediate processing and safety of bills of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.

While bitcoin remains the most popular cryptocurrency, it suffers from high volatility in its valuation. For example, it rose from around $5,950 in November of last year to above $19,700 in December and then declined by almost two-thirds to the $6,900 level in early February. Even its intraday price swings can be wild; It is common to see the cryptocurrency rising more than 10% in either direction within a few hours.

This kind of short-term volatility makes bitcoin and other popular cryptocurrencies unsuitable for everyday use by the general public. Essentially, a currency must function as a medium of monetary exchange and a way of storing monetary value, and its value must remain relatively stable over a long time horizon. Users will refrain from adopting it tomorrow if they are not sure of its purchasing power.

Ideally, a crypto coin should maintain its purchasing power and have the lowest possible inflation, which is enough to encourage the token to spend rather than save. Stable coins provide an answer to realize this ideal behavior.

Two number one motives for the rate balance of fiat currencies are the reserves that back them and the well-timed marketplace moves with the aid of using the controlling authorities, like central banks. Since fiat currencies are tied to an underlying asset, such as gold or foreign exchange reserves that act as collateral, their valuation remains free from wild swings.

Even in some extreme cases when the valuation of a fiat currency can rise sharply, controlling authorities manage the demand and supply of the currency to maintain price stability. Most cryptocurrencies lack both of these key features - they have no reserves to back their valuations and they have no central authority to control prices when needed.

Stable coin seeks to bridge this gap between fiat currencies and cryptocurrencies. There are three categories of stable coins, all based on their mechanism of action.

Fiat-collateralized stable coins maintain a fiat currency reserve just like the US dollar as collateral to issue an appropriate number of crypto coins. Other forms of collateral can include precious metals such as gold or silver, as well as commodities such as oil, but most current fiat-collateralized stable coins use dollar reserves.

Such reserves are maintained via way of means of unbiased custodians and are often audited for adherence to the vital compliance. Tether (USDT) and TrueUSD are popular crypto coins that have a value equivalent to one US dollar and are backed by dollar deposits.

Crypto-collateralized stable coins are backed by other cryptocurrencies. Since reserve cryptocurrencies can also be prone to high volatility, such stable coins tend to be “hyper-collateralized” – that is, a large number of cryptocurrency tokens are held as reserves for issuing a small number of stable coins.

Non-collateralized stable coins do not use any reserves but incorporate a central bank-like mechanism to maintain stable prices. For example, the dollar-denominated base coin uses a consensus mechanism to increase or decrease the supply of tokens based on need.

Such actions are similar to those of central banks printing banknotes to maintain the valuation of fiat currency. It is often achieved by implementing a sensible contract on a decentralized platform that will run in an autonomous manner.