Steemit Crypto Academy Contest / S8W2 - What are Stablecoins?

Hello Friends,

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Many thanks to the consistent and hard-working Admin and Moderators of the Steemit Crypto Academy community. It's been a lovely run with you all thus far, and I commend your efforts and positivity towards the growth of the Steemit ecosystem.

For the second week of season 8, you have presented a very important topic titled What are Stablecoins? by @crypto-academy.

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It's true that the fluctuating nature of a crypto asset can make an investor become rich over night, but it's also important to know that this same changing trends could bankrupt and make an investor go completely poor.

This is where the creation of stablecoins comes to play, as it refers to a form of digital currency maintaining a stable value (usually pegged to the native currency of a nation or central bank).

There are many factors and stories behind the creation of stablecoins, so follow this article, as I would be sharing my understanding and views with us all.

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My Understanding On Stablecoins And How To Ensure A Stable Price

The cryptocurrency market as we have observed thus far, usually generates profits or cause losses to an investor, given the fact that it fluctuates and becomes even more unpredictable every passing second.

The volatile and changing nature of the cryptocurrency market was what brought about the creation of a digital asset with a stable value to help store and maintain balance of our daily transactions in the blockchain space.

Stablecoins are naturally designed to pegged to fiat currencies like the US Dollar, Euro, and even Gold. They intend to offer users the advantages of blockchain technology without the risk of price volatility

Stablecoins are unique in their transfer of value, in the sense that they can be used as an alternative to traditional banking systems for payments of goods and services. Unlike the case of Bitcoin and other altcoins, where we could see drastic change of price value within few seconds.

And as for the issue of how I ensure a stable price, I usually make better research about a particular proclaim stablecoin before venturing into it

What I focus on apart from it's recent performance and history, is the underlying technology behind it. Because the technology that is used to power a stablecoin usually plays a major role in it's price stability.

In most cases, the mechanism used is what balances and adjusts the supply of coins in circulation, with the aim of securing stability of value.

Like in the case of algorithm stablecoins, where a certain percentage of asset is set aside as collateral to liquidated and adjust price level.

In essence, the sole aim of this mechanism is to reduce volatility by quickly detecting price movement, and automatically buying or selling tokens on the market depending on the price change.

Why Stable Coins Were Created And How Useful Are They?

It all started the moment we began to realize and see the need for a revolution in the financial sector, given the fact that our financial access were being centralized and control by a centralized company or other entities (usually the central banks).

This gave rise to the creation of a financial industry by the pseudonym "Satoshi Nakamoto," using an underlying technology called "blockchain."

One of the biggest features of this blockchain technology was it's decentralization, but many individuals kicked against it's adoption because of the uncontrollable and unpredicting nature of it (Bitcoin).

Since the nature of Bitcoin and other altcoins created after it were very unpredictable and risky due to the high volatility they provide, the creation of a stablecoin with less volatility was then necessary.

Stablecoins have been designed to help investors and other centralized companies make trades and maintain value for goods and services exchanged without worrying about the drastic change in price value.

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How Useful Are Stable Coins?

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The importance and usefulness of stablecoins to the cryptocurrency sector can be clearly seen and observed across the blockchain ecosystem. You would agree with me that volatility is a very important aspect to consider when trading cryptocurrencies because of the potential profits it could generate for Investors.

But we can also attest to the fact that this same volatility is risky to others, as it could cause lost of value to their initial high valued services.

With the existence of stablecoins, the values of services traded with cryptocoins can be secured /maintained even in the midst of a fluctuating market.

USDT showing stability in bearish market

A good example could be seen in the screenshot shown above from my roqqu wallet. They were massive downtrends in the price of many major cryptocurrencies including Bitcoin, Litecoin, ETH, XRP, DOGE, and many more.

But my coins which were stored and maintained as stablecoins (stored in USDT) were safe from the fluctuating and downtrend market movement.

With this example shown above, you could see and analyze the usefulness of stablecoins, as they retain value, hedge against inflation, and keep the minds of the merchants at rest from worrying about devaluation.

Some Of The Most Popular Stablecoins I Have Heard About

Just like we have seen how important and useful the existence of stablecoins are to the cryptocurrency industry, they have been creations of several types of cryptocurrencies across the blockchain space, some of which includes:

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Tether (USDT)

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The first and probably the most popular stablecoin I came to know about in the crypto space. USDT was created and launched in 2014, and so far, an estimate of about $70 billion USDT is in circulation today.

What makes this coin even more popular and widespread is because it was designed to peg the value of the US dollar. It has since been reliable to some extend, and has been adopted by many marchants for the purpose of trading and international payments.

USDT has remained one of the most stable coins because it is directly linked to the USD currency held in its reserve, helping it to maintain and regulate the value the US dollar.

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Binance USD (BUSD)

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This is another stablecoin backed by the US dollar, and held in reserve by Paxos Trust Company. It the official stablecoin of the Binance exchange, and is available on both Binance and Ethereum blockchains.

Many investors prefer using this coin for margin trading on Binance, as it is a good option for those trying to take advantage of leverage.

Although many traders don't perpetually find BUSD as stable as USDT, because it's exchange rate doesn't always tally with the dollar pegged rate.

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Paxos Standard Token (PAX)

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This is another popular stablecoin I got to know about being issued on the Ethereum blockchain and backed in a 1:1 ratio with USD. What this implies is that for every one PAX token, there is one US Dollar held in reserve by Paxos.

Paxos was originally designed to be regulated by a financial service in the New York, which has made it one of the most secured stablecoin.

For the fact that this coins were built on the Ethereum network, there are many advantages accompanied with it as with every ERC20 token, like smart contract compatibility and interoperability with other projects.

And Why I Use USDT More

USDT is the stablecoin I uses the most, not only because it was the first stablecoin I got to know about, but because it's very reliable when compared to other stablecoins.

It was designed to directly maintain the value of USD, and it has been doing just that for may years now. I prefer using this coin because of its widespread availability on almost every exchange I have seen.

It equally has a lesser fee charge for transactions when compared to other stablecoins, and that's the more reason we see many people using it as the preferred stablecoin.

It equally offers a comfortable degree of privacy to its users. So if you are looking for a stablecoin to help secure your funds from volatility, without sacrificing too much in terms of cost or privacy, then Tether (USDT) is the perfect choice.

Is It Possible For A Stablecoin To Lose It's Stability? With Some Cases To Back My Answers

For a direct answer, I would say yes, a stablecoin can become unstable when hit with the worst challenges. Cryptocurrency assets have their benefits, and at the same time, they are not completely free from risks.

There have been some very popular and surprising cases of stablecoins becoming unstable below are some of them.

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USDT Went Unstable

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Before the popular case of stablecoin going unstable barely 1 year ago, they had been cases of USDT losing its stability in 2018.

But for this task, I would be talking about the case that happened around May of 2022. The USDT company were under suspect about claiming that their assets been backed by the US dollar.

Investigations had revealed that a larger part of the companies assets were not actually backed by the USD as claimed, but were instead used to other cryptocurrencies across various exchanges.

The news of this allegations saw the price of USDT dropped significantly, and many investors lost the trust they once had for the acclaim USDT stablecoin.

Whale's tweet on USDT instability

As seen on the screenshot shown above, Mr. Whale on his Twitter account posted about the flash crash of USDT he had recorded within few minutes. It saw the price of USDT which had fallen to $0.0013 move back up to $0.9934 within 54 minutes.

USDT had to equally face some regulatory issues, given the fact that it was regarded an unregistered security by the US Securities and Exchange Commission (SEC).

USDT issue with SEC Reddit

As seen in the screenshot above, and from stories shared at that time, you could see that the USDT company were having serious and uncleared issues with the US SEC.

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Paxos Standard Token (PAX) Went Unstable

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This is another popular stablecoin that losts it stability in 2019, as they was a slight drop in it's price from $1 to around $0.90 at that time, before quickly recovering back to normal.

As for the case of this PAX price decline, it was later reported that the movement was as a result of increased demand from investors seeking safety from the volatility of Bitcoin and other altcoins.

It was great to that PAX recovered fast, and has since been as stable as possible, while equally being regulated by a reliable institution like NYDFS.

The Advantages And Disadvantages Of Stablecoins When Compared To Traditional Cryptocurrencies

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Some Advantages Of Stablecoins When Compared To Traditional Cryptocurrencies Includes:

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• One of the major advantage offered by stablecoins is the reliable form of value storage and transfer, which allows investors to make long term plans for their investments, even in the midst of an unstable economy.

• Stablecoins are usually linked to real world assets, giving them the ability to maintain a less volatile market.

• Stablecoins also provide users with greater liquidity than most traditional cryptocurrencies, and this makes them more attractive for making payments across various exchanges.

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Some Disdvantages Of Stablecoins When Compared To Traditional Cryptocurrencies Includes:

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• In a situation where the linked asset or currency of the stablecoin experiences a sudden decrease in value, then the value of the stablecoin will also decrease.

• Some stablecoins may be subjected to inflation depending on how they are being managed and maintained, as we have seen various economic and social factors affecting the price of some stablecoins in the past.

• Most stablecoins are regulated and controlled by various organizations and centralized bodies, making then not so transparent to investors.

Conclusion

I would commend that stablecoins have added more reliability to the cryptocurrency world, as investors and merchants can now pay for goods and services without worrying about fluctuating nature of the crypto market.

Regardless of the amazing benefits offered by stablecoins, we should always make good research on any stablecoin we wishes to venture into.

Generally, I find this topic very interesting and educative. I would stop by saying a big thank you to the organizers of this contest, keep up with the good work.

Am inviting @carlaisl, @enveng, and @mvchacin, to check out this contest.

Thanks for your time here.