DeFi 30-for-30 #5:
Stablecoins
Volatility is inevitable in crypto. Stablecoins are designed to impart certain stability. How does it fit into DeFi?
Thread 👇
Stablecoins
Volatility is inevitable in crypto. Stablecoins are designed to impart certain stability. How does it fit into DeFi?
Thread 👇
1/ Many people or traditionalists argue against holding crypto due to its price volatility.
Thus, stablecoins are created with a certain peg to ensure that they are stable in value and each coin will hold a fixed assigned value.
Thus, stablecoins are created with a certain peg to ensure that they are stable in value and each coin will hold a fixed assigned value.
2/ USDT or Tether is the most popular stablecoin to date with the highest marketcap of $68bil.
Its value is backed by cash and other financial instruments that are equal in USD value to the number of USDT in circulation.
Its value is backed by cash and other financial instruments that are equal in USD value to the number of USDT in circulation.
3/ There are many other issuers of stablecoins such as:
- Circle (USDC)
- Paxos (PAX)
- Gemini (GUSD)
- Binance (BUSD)
.. and others
All of them feature a stable 1:1 peg against the US dollar.
- Circle (USDC)
- Paxos (PAX)
- Gemini (GUSD)
- Binance (BUSD)
.. and others
All of them feature a stable 1:1 peg against the US dollar.
4/ As stablecoin issuance grows, there will always be concerns regarding whether the coin in particular is truly 1:1 backed USD, such as the case for Tether.
Thus, they come out with audit reports for their reserves regularly to address these concerns.
Thus, they come out with audit reports for their reserves regularly to address these concerns.
5/ The above stablecoins are fiat-backed, meaning their value is still pegged to the fiat system as the USD can be printed by the Federal Reserve. They carry the risks of centralisation.
Another type of stablecoin was thus created, one that is decentralised.
Another type of stablecoin was thus created, one that is decentralised.
6/ DAI is a type of decentralised stablecoin issued by MakerDAO, with its value backed by a basket of other valuable crypto assets held as collaterals, such as Ether and Bitcoin.
Each DAI is equal to approximately $1.
Each DAI is equal to approximately $1.
7/ Besides the fiat-backed or crypto collateral-backed stables, there's another type of stablecoin called the algorithmic stablecoin.
- Terra UST
- FRAX
- cUSD
- Terra UST
- FRAX
- cUSD
8/ Decentralised and algorithmic stablecoins rely on the protocol's programs and complex algorithms to maintain the peg.
- minting and burning
- continuously buying and selling in the open market to push the value to a fixed point
- open market arbitrage
- minting and burning
- continuously buying and selling in the open market to push the value to a fixed point
- open market arbitrage
9/ The quest for a truly decentralised stablecoin is far from over as none of the above is perfect.
However, as a user, it's enough for you to know that there's a way to keep the value of your assets relatively stable in the crypto world.
However, as a user, it's enough for you to know that there's a way to keep the value of your assets relatively stable in the crypto world.
10/ Stablecoins will be a fundamental feature as an on-ramp onto crypto as it provides a frame of reference for valuing and pricing crypto assets.
It also provides a safe haven in times of increased price volatility.
It also provides a safe haven in times of increased price volatility.
TL;DR
- stablecoins can be fiat-backed, overcollateralised or algorithmic (these categories might change rapidly in the future)
- their value is stable; aiming for 1:1 against the USD
- stablecoins can be fiat-backed, overcollateralised or algorithmic (these categories might change rapidly in the future)
- their value is stable; aiming for 1:1 against the USD
Addendum: if you want better than FD rates, consider converting some of your portfolio to stablecoins. Many protocols offer high yields for staking your stablecoins.
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