Stablecoins are a central and crucial component of they digital asset space as the offer stability in a very volatile market.
This post will explain what stablecoins are, how stablecoins work and their current and future impacts on the digital asset space.
What are Stablecoins
Stablecoins are a type digital currency that is pegged to the value of physical currencies, or assets. This means the value of a stablecoin can be pegged to the United States Dollar, Euros, or even gold. Since stablecoins are pegged they always have the same value as whatever they are pegged to.
The most popular stablecoins:
1. USDC - This stablecoin is issued by a company called Circle. USDC is pegged to the value of the US dollar, therefore 1 USDC will always be worth 1 USD.
2. USDT - This stablecoins is issued by a company called Tether. USDT is pegged to the value of the US dollar, therefore 1 USDT will always be worth 1 USDT
3. PAXG - This stablecoin is issued by a company called Paxos. PAXG is pegged to the value of gold, therefore 1 PAXG will always be worth 1Oz of gold.
4. EUROC - This stablecoin is issued by a company called Circle. EUROC is pegged to the value of the Euro, therefore 1 EUROC will always be worth 1 Euro.
How do stablecoins work
Stablecoins have two main mechanisms of working: full collateralized model and the algorithmic model. This article will cover the fully collateralized model as Sunshine Exchange utilizes fully collateralized stablecoins only. If you want to learn more about the algorithmic model you can read this article.
In the fully collateralized model, the value of the stable coin is backed 1:1 by real world fiat currencies, or assets eg USD, euros, gold etc...
Companies such as circle will issue 1 USDC to a customer when they receive 1 USD, they will then hold the USD dollar in their reserve accounts until that 1 USDC is redeemed by a customer. This results in the value of 1 USDC always being worth USD as 1 USDC can be redeemed for 1 USD at any time.
The peg of a stablecoin may fluctuate sometimes due to people selling one stablecoin for another, this results in the peg moving, however these price differences always move back to a 1 dollar due to the issuing companies ability to always redeem that stablecoin for 1 USD.
Stablecoin issuers are also independently audited to ensure their accounts balances are balanced and accurate.
Why use stablecoins
Stablecoins have several uses in the digital asset space:
1. They allow for price stability amongst very volatile assets. Stablecoins are often used by traders and investors in the digital asset space to move profits into that are more easily accessible as compared to USD. This allows them to quickly utilize the stablecoin to repurchase a digital asset if the price moves lower while also keeping the value of those profits since stablecoins don't move in price.
2. Stablecoins are very efficient to use in terms of accessibility. Any volume of stablecoins can be moved within seconds without the need for approval by a third party. This allows traders, investors, or people using the stablecoin for personal or commercial means to utilize the stablecoins in any way they please at any point in time from anywhere.
Follow this link if you want to learn more details on using "Stablecoins in Trinidad and Tobago".
