What Are Stablecoins? - The Complete Guide

 

By Nerly Shammah Apr 05, 2023

 

Stablecoins are digital assets that are pegged to a defined value of a secondary asset.

 

Stablecoin  explained

 

Most stablecoins are pegged to the value of the US dollars, this means that they are designed to maintain a value of $1 at all times. This includes most of the centralized stablecoins out there like USDT and USDC. 

 

At Glance

 

● Stablecoins are a type of cryptocurrency that derives their price value from being pegged to a defined value of a secondary asset.

 

● There are two types of stablecoins: centralized stablecoins and decentralized stablecoins. 

 

● Centralized stablecoins are often fiat-backed, that is either backed by US dollars or Euros perhaps. Notwithstanding, some centralized stablecoins are backed by physical assets like gold. 

 

● Decentralized stablecoins are oftentimes sub-categorized as "Algorithmic Stablecoins and Crypto-Collateralized Stablecoins" as though they either autonomously follow a predefined set of rules(algorithms) to function, other times called smart contracts or are backed by a crypto reserve.

 

● An example of an algorithmic stablecoin is Hive Backed Dollar(HBD), a decentralized stablecoin for the Hive Blockchain.

 

● Stablecoins were created to curb the high effects of the volatility of cryptocurrencies, thus they aid and serve as a form of stability in the cryptocurrency ecosystem.

 

● The biggest centralized stablecoin is USDT and the biggest decentralized stablecoin is DAI.

 

 

Understanding The Importance Of Stablecoins

 

Although sometimes addressed as if they weren't cryptographically protected assets, stablecoins are more suitable assets for the name "cryptocurrency". This is because they are a great medium of exchange and actual store of value that can maintain a relatively stable price value, unlike other crypto assets.

 

The primary role of stablecoins is "financial stability". With fiat-backed stablecoins, a bridge between traditional finance(TradeFi) and Decentralized Finance(DeFi) is created that allows fiat currencies to populate the cryptocurrency ecosystem and be leveraged as a value piece or medium of exchange. Stablecoins open up a whole lot of possibilities for global trades as though cryptocurrencies are borderless, fast-growing and cost-effective asset classes. Stablecoins being powered by cryptography and blockchain technology enjoys these values and allow for financial operations to reach a new scale of stability and flexibility. 

 

Types Of Stablecoins

 

There are two types of stablecoins namely:

 

● Centralized Stablecoins

● Decentralized Stablecoins

 

Centralized stablecoins are a type of stablecoin that is centrally backed, managed and issued. Most centralized stablecoins are backed by fiat currencies, that is like US dollars or Euros, an example of such stablecoins is USDT, one of the largest cryptocurrencies by market capitalization. USDT is issued, controlled and backed by a central body, this makes it a direct equivalent or similar to what fiat currencies are, only that they are not issued by the Central Banks. 

 

Notwithstanding, due to the exponential growth of the cryptocurrency ecosystem, governments of the world are beginning to give stablecoins some attention, recent reports highlight Latin America’s Biggest Investment Bank  - Brazil-based BTG Pactual launching its own stablecoin on the Polygon Blockchain.

 

Decentralized Stablecoins, on the other hand, are not centrally managed or issued, there are either governed via the consensus of stakeholders through consensus protocols that allow the minting(printing and issuance) and burning(eliminating) of the stablecoins or simply managed by algorithms that autonomously mints and issues new tokens and likewise buys back and burns tokens based on preset parameters of the token supply and its pegging asset. For example, the Hive Backed Dollar(HBD) is an algorithmic stablecoin that is managed by an autonomously functioning algorithm called the "hbdstabilizer" that leverages community-distributed funds to trade the stablecoin's market to ensure a peg of $1 is maintained at all time. 

 

This is possible because, unlike fiat-backed stablecoins, Hive Backed Dollar(HBD) isn't directly pegged to the US dollars, but pegged to Hive worth $1. So 1 HBD should at all times be convertible to Hive worth a dollar. Isn't that just like Terras UST? Short answer No! 

 

Unlike UST which had a rather similar model and crashed due to an exploit in price arbitrage, HBD has been in existence before UST and has risk management parameters that if triggered, stop the printing of HBD and rather inflate the Hive supply to enable the stablecoin resume peg. This parameter is that HBD should never be higher in supply than 30% of Hive's market capitalization. In any situation where HBD's supply or market cap reaches 30% of Hive's market cap, the printing stops and more Hive is created to offset the figures. 

 

All of this happens autonomously, thus the network and users attain full decentralization of their wealth, ensuring that the risk of third-party involvement in financial operations is eliminated.

 

Easiest Ways To Get Stablecoins

 

The easiest way to get stablecoins is to buy them from exchanges. You can buy fiat-backed stablecoins like USDT and USDC from centralized exchanges like Binance, Kucoin and Okex. You can buy decentralized stablecoins like DAI from Decentralized Exchanges like Uniswap or Pancakeswap. To buy the Algorithmic Stablecoin - Hive Backed Dollar you'll need to buy Hive From Binance, send it to a native Hive account and buy HBD from Hivehubdev. Or simply buy it from Pancakeswap as "bHBD or bhbd".

 

Fun Facts:

 

● Hive Backed Dollar(HBD) offers a 20% APR on stablecoin savings, all you need is a Hive account and some HBDs to start earning.

 

● Stablecoins can either be absolutely collateralized, under-collateralized or over-collateralized, all depending on the risk factor and what ensures the closest to absolute price stability.

 

● No stablecoin is absolutely stable, they are all relatively stable, and some aren't in any way stable, thus, do your research and consult experts before investing in any stablecoin.

 

● There are numerous stablecoins pegged to the price of Bitcoin. The largest of all by market capitalization is called wrapped BTC(WBTC).

 

 

 

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