STABLE COINS a.k.a. The Tokenization of FIAT currencies

Why stable coins are the new central bank money

Since last year, stable coins have become increasingly popular and have strengthened their position. But it seems that most user passwords or just people who are interested in them cannot understand the concept of them.

The main reason is that this concept is really complicated because most projects are not yet ready for large-scale use, or that they are generally just white papers, which is obviously difficult to understand.

What is a stable coin?

Stable coin is a cryptocurrency that is backed by a FIAT currency like USD, EURO, GBP, CAD, AUD, even if those currencies are constantly loosing purchase power as inflation make them worth less every year, we will call them Stable. Most of them are linked to the U.S. dollar, but some of them will eventually shift to a currency basket or index, such as the consumer price index. Therefore, expressed the dream of creating money independently of Fiat.

Why do we need a stable cryptocurrency?

One of the most common arguments in favor of the stable coins is that they are able to guarantee that we are protected from volatility by storing them.
For example: If Bitcoin’s price is $8,000 and you sell a bitcoin-stabilized coin tied to the dollar, you will get 8,000 units of stable coins. Imagine Bitcoin’s price drop to $ 7000 in one week. But you still have a stable coin’s price of $ 8000, which can be converted back to Bitcoin at any time. Therefore, you do not lose $1000 due to volatility.

What is left of central bank money?

The big banks now understand that the crypto-economy will sooner or later change our financial and monetary system. Even though stable coins are only a derivative of a central bank currency, a new currency type is created. Setting standards here to retain as much power and control as possible is a sensible strategic move from the point of view of a large bank. Of course, it will take many months and years for consumers to trust the stable coins. The path is shorter than Bitcoin and other cryptocurrencies. After all, stable coins are not new currencies, just a new way of securitizing currencies. Only the issuer is new: it is the bank or the blockchain start-up and not the central bank.

What Are Stablecoins Used For?

For many cryptocurrency traders, they serve as a lifeboat to escape to when they want to hedge their crypto portfolio without cashing out to FIAT. This is very effective especially during bear markets or to keep profit in FIAT value. After all, the world’s day-to-day currency is still FIAT and not Bitcoin.

Stablecoins are also likely to become a critical component in decentralized finance (DeFi). DeFi presents an alternative to the existing financial systems with one which is built on public blockchains.

This notion has recently become popular and there was a severe increase in the projects developing exciting products, such as peer to peer loans. If DeFi is to grow, stablecoins will undoubtedly play a vital role because people would need a volatility-free means of transacting with each other, without losing the benefits of cryptocurrencies.

The Three Types of Stable Coins on Bancambios ecosystem

In a rather broad categorization, there are three identifiable types of stablecoins.

Centralized Stablecoins Backed By FIAT

These are backed 1:1 by fiat currencies, which are stored in bank accounts. Examples: Tether (USDT), USD Coin (USDC), Gemini USD (GUSD), and so forth. They are centralized because they are launched and governed by a central organization, which could be either a company, a bank or even a government.

Decentralized Stablecoins Backed By Crypto

These are a relatively new type of stablecoins which don’t have a central operator but are governed by a consensus of the users who take part in the network.

An example here is Maker DAO’s stablecoin — DAI. Users can lock up a certain amount of cryptocurrencies, such as Ethers, as collateral for borrowing DAI, which is pegged to the US Dollar.

Decentralized Algorithmic Stablecoins

These are still relatively new. They don’t have any collateral backing their system, and they rely on algorithms to get their price in order to remain stable.