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What is Stablecoin?

What is Stablecoin?

USDC Dominates Stablecoins with $452 Million Market Cap-Techcryption-01

Most crypto exchanges offer trading pairs like USDT, USDC, DAI, BUSD, and more. Commonly, a stablecoin is a type of cryptocurrency pegged or backed by a fiat currency. However, it is possible to peg it with other commodities.

Fiat stablecoins are common, but how well do we know about it? Let’s explore about stablecoins on the issuers, circulating supply, and the technicals behind it.

The origin

In 2014, a paper released by Robert Sams discussing the incorporation of the elastic supply rule and its problems. Based on it, he suggested the mechanism algorithm, decentralized, open-source, and auditable by everyone. It is named the Seigniorage Shares.

Central banks usually control the fiat currency supply in a centralized manner. As for a stablecoin, it is algorithmically to meet the market demand and supplies in a decentralized way.

Seigniorage Shares is one of the early proposals to manage risks and volatilities in cryptocurrency.

For example, Tether (USDT) is a stablecoin pegged to the US Dollar, which means that one Tether token equal to $1, and the 1:1 ratio is maintained all the time together with circulating supply.

Why stablecoin?

Stablecoin exists to maintain price stability. The problems arose because cryptocurrencies are highly volatile such as big price swings daily. Therefore, it is unsuitable for mass adoption. For example, a medium-size pizza costs around 1 BTC. However, tomorrow it will cost 2 BTC for the same size pizza.

Stablecoin should be able to bridge the volatility gap by ensuring safer options for investors to guard their investments.

Different types of stablecoin

There are four widely known stablecoin types with its known project;

  1. Fiat-backed: Tether USD, True USD, Binance USD
  2. Commodity-backed: DigiX
  3. Cryptocurrency-backed: DAI, Synthetix
  4. Seignorage (non-collateralized): no known project at the moment.

Each type of stablecoin has its advantages and disadvantages depending on functions.

The demand and supply

The main issue to understand is probably something like this, if a central bank can print out money infinitely, how stablecoin is any different?

It depends on the mechanism used by the stablecoin provider.

For example, USD Coin (USDC) is a fiat-backed stablecoin created by Circle and Coinbase. However, CENTRE is the entity responsible for governing and managing the USDC. CENTRE is a technology network manager and provider for its members.

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There are two situations to explain the USDC movement in terms of supply. Whenever a customer deposits their fund to on-board USDC, the CENTRE network will verify and validate the request. After verification, USDC tokens will be withdrawn from the pre-funded buffer reserves. New USDC tokens will be minted if the buffer reserves are depleted.

After a redemption request is verified, USDC tokens will be withdrawn from circulation and will be reserved. However, if the USDC reserve value surpassed the pre-funded buffer, the token will be burned.

Stablecoin VS Central Bank Digital Currency

Some might mistakenly compare stablecoin with central bank digital currency (CBDC) is the same. Both are digital, yes, but the definitive function is different.

Stablecoin is privately issued, unlike CBDC that is issued by the central banks. Even so, there is still no extensive reference on CBDC yet because some central banks are still experimenting and studying it.

The current state

Based on the stats in CoinGecko, the top five stablecoin according to market capitalization at the time of writing are;

  1. Tether ($19.7 billion)
  2. USD Coin ($3 billion)
  3. Dai ($1 billion)
  4. Binance USD ($670 million)
  5. Paxos Standard ($392 million)

Stablecoin applications and usages might change in the future because of continuous innovation, regulations, and adoption. Whatever it will be, crypto is here to stay.

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