Everything You Need to Know About Stablecoins
Cryptocurrencies have had a long-standing reputation of being a particularly unstable financial instrument. Unlike other forms of crypto, which can have wildly fluctuating values, fiat-backed stablecoins strive for extremely low price changes. To keep cryptocurrency’s inflationary tendency under control, users must be persuaded to spend rather than save their tokens. Stable coins allow us to bridge the gap between fiat currency and cryptocurrency stability.
Market participation in terms of volume and market capitalisation has significantly increased in recent years because stablecoins have provided a mechanism to find safety in the cryptocurrency market. More people are deciding to participate in the market as stablecoins become a popular option for crypto-investors. In fact, stablecoin adoption has exploded over the last year, with a collective market cap rise from around $10 billion to over $100 billion.
What are Stablecoins?
Stablecoins are a type of cryptocurrency that is backed by an asset (stablecoins are pegged to fiat currencies, such as the US dollar). Stablecoins were created to minimise volatility. They are unaffected by market fluctuations, unlike other cryptocurrencies such as Bitcoin. Stablecoins are preferred by Bitcoin market participants over traditional “risk-off” assets for a variety of reasons. For example, being in the cryptocurrency market allows investors to shift between trades more efficiently without having to wait for their funds to be converted to fiat currency. There are also a significant number of cryptocurrency exchanges that do not allow fiat currency trading, leaving stablecoin as the only option.
An interesting feature of stablecoins is that many now operate with smart contracts built into the blockchain. The software code automatically produces the terms of the contract plus how and when the money will be transferred. The smart contract’s goal is to ensure security throughout transactions while also lowering transaction costs. In comparison to the previous system, it saves time and conflict while also being a cheaper, faster, and a generally more secure method of payment. Essentially, smart contracts are decentralized digital superior agreements that provide better transparency and extreme centrality.
What Types of Stablecoins are Available?
There are three different types of stablecoins:
· Fiat-backed stablecoins,
· Cryptocurrency-backed stablecoins
· Non-collateralised stablecoins.
Fiat Backed Stable Coin
The first and most common is the fiat-backed stable coin. They have a relatively straightforward structure as the fiat-backed concept is uncomplex (their value is fixed at a 1:1 ratio to the pegged asset).
Gold and other commodities can also be used. The reserves are frequently managed by independent custodians who are regularly audited for compliance purposes.
Cryptocurrency-Backed Stablecoins
Crypto-backed stablecoins function in the same way that a fiat-backed stablecoin does. This type of stablecoin holds its value to a pegged asset, with the only real difference being the crypto-backed stablecoin has cryptocurrency locked up as collateral.
Non-Collateralised Stablecoins
Non-collateralised stablecoins do not involve the require any reserve asset. Their stability is derived from a working mechanism, such as that of a central bank. For example, the cryptocurrency base coin uses an algorithm to calculate whether to increase or decrease the supply of tokens.
How to Earn Money with Stablecoins
Stablecoins can be used to generate profit by:
· Accruing interest
· Providing loans
· Staking stablecoins
Accruing Interest
By opening an account with a cryptocurrency exchange, daily interest can be accrued on the held stablecoins. Most exchanges do not require a minimum balance and there a very few fees attached to the accounts.
If a crypto-investor chooses to invest in a commodity-backed stablecoin such as gold, it is the equivalent of buying physical gold. When the price of gold rises so does the stablecoin. This, however, is not the case with fiat-backed stablecoin. The value of fiat currencies, such as the US dollar, is designed to be stable and remain unaffected by changing marketing conditions. The value of a stablecoin tied to a fiat currency is unlikely to alter over time.
Providing Loans
Stablecoins may be lent out to borrowers. Investors lend fiat money or cryptocurrencies to other borrowers in exchange for interest payments in crypto lending. The annual percentage yield ranges from 5% to 12% approximately.
Staking Stablecoins
Staking is locking crypto to yield a reward, it is similar to depositing money in a savings account. It requires contributing to the maintenance of blockchain’s flow regarding a particular asset. In exchange, the investor will be reimbursed by the network’s income.
Centralised vs. Decentralised
Stablecoins can be divided into two types: centralised custodial stablecoins and decentralised non-custodial stablecoins, each with its unique set of selling points.
Centralised, custodial stablecoins are generally fiat collateralised off-chain. As you know, stability is maintained directly or through a third-party custodian like a bank backing token liabilities with the equivalent asset, bridging the gap between traditional finance and the crypto world.
Centralised stablecoins are deposited onto a blockchain such as Ethereum, where the goal is to maintain supply and demand to keep the peg value steady. This is done through a minting and redeeming system model. Although discrepancies are uncommon, when they do occur, they incentivise users to take advantage of any anomalies in the price until it is fixed.
Although centralised stablecoins were the first model to market and enjoy a lot of popularity to this day, there are some glaring inefficiencies compared to the decentralised model. For instance, it is expensive to mint and redeem coins, and the cost is further compounded by the custodian’s operational and auditing fees. Another chink in the armour is that this model is also privy to censorship, which is not the case with decentralised stablecoin.
Decentralised stablecoins rely on a proof of stake model which is far more sustainable and removes the fear of stablecoins being manipulated. Decentralised stablecoins can be further split into two categories; crypto-collateralized and algorithmic stablecoins are the two types of decentralized stablecoins.
Algorithmic Stablecoins
Algorithmic stablecoins are a new form of cryptocurrency that aim for price stability and equilibrium. This is achieved by pegging the circulating supply of an asset to a reserve asset such as the US dollar, gold or any other foreign currency. As the name suggests, algorithmic stablecoins use algorithms to maintain the circulating supply of the asset.
The other groups are fiat-collateralised, such as USDC and USDT. These are backed by financial institutions; and crypto-collateralised, like DAI, are backed by one or several digital assets instead of cash, such as ETH and BAT.
Stablecoins and Regulation
The conversation around stablecoins and regulations is only just beginning. Last week, the U.S. Securities and Exchange Commission (SEC) chair stated that it is time to regulate cryptocurrency markets. The chair of the U.S. Federal Reserve has also issued a call for the regulation of stablecoins. Regulators are paying a lot of attention to stablecoins, more so than other cryptocurrencies that have come before, such as Ethereum and Bitcoin. Stablecoins are safe, low-cost, work in real-time and offer competitive payments, because of this they are being forecasted to play a major role in the future of finance.
But it’s not just stablecoins that are in the spotlight. Last month, French regulators proposed that EU governments hand off the responsibility for overseeing cryptocurrencies to the pan-European watchdogs. The regulators believe it should not be the responsibility of national supervisors and are suggesting a shift towards a more centralised approach. The FCA (Financial Conduct Authority) is also keeping a close eye on the cryptocurrency market in the UK as it is now taking charge as the anti-money laundering and counter terrorist financing regulator.
Ardana Stablecoins
Ardana is set to launch its new stablecoin and DEX at the end of the year. The Ardana Dollar (dUSD) is a decentralized, unbiased, on-chain, collateral-backed cryptocurrency soft-pegged to the US Dollar.
Users earn dUSD by putting a Cardano native token into the Ardana platform using smart contracts. The circulating supply of the dUSD is made up of deposits that mint dUSD, giving the user access to liquidity. Because the value of the collateral exceeds the dUSD debt, every dUSD issued and in circulation is directly backed by extra collateral. The debt must be repaid before the collateralized asset in an Ardana vault backing a dUSD loan can be released. On the Cardano blockchain, all dUSD transactions are visible to the public.
Ardana is not only launching a stablecoin but also a decentralised exchange (Danaswap) too. One of the most important features of Danaswap is that it achieves significantly less slippage compared to other platforms. Traders can lock in trades without having to worry about any price changes.
Ardana has created a completely decentralised governance model, where the community will enjoy voting rights and have a say in the parameters of the projects through their DANA tokens. To vote and access platform rewards, the platform users must stake their DANA tokens to earn exDANA.
There are many exciting features on Ardana and the crypto community are looking forward to its launch on Cardano in Q4.
The Future of Stablecoins
Investors are increasingly looking to stablecoins as a safer way to invest, it is relatively straightforward and a good opportunity for beginners to enter the arena of cryptocurrency. The use of centralized custodial stablecoins is expected to become more regulated and restricted in the future.
As the market matures and users realise that on-chain multi-fiat exposure is the only rational choice for monetary transfer, the non-custodial nature of decentralised stablecoins will continue to trump the market share of their centralized alternatives, putting decentralised stablecoins firmly on track to becoming one of the most important verticals in DeFi.
Ardana
Ardana is an on-chain asset-backed stablecoin protocol and decentralized exchange stable asset liquidity pool built on Cardano. The stablecoin is overcollateralized with on-chain Cardano native assets facilitating borrowing and the decentralized exchange allows for highly capital efficient trading between stablecoins and identical assets with low risk income from fees for liquidity providers.
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