Nowadays, “stablecoins” are considered to be the safer version of cryptocurrency, as they allow users to enjoy the benefits of acquiring cryptocurrencies that don’t have a high volatility risk, such as Bitcoin. For the majority of its enthusiasts, cryptocurrency remains a speculative investment. This deviates far from what Satoshi Nakamoto envisioned about ten years ago, when Bitcoin was created as an alternative and solution to today’s monetary system. In this article we will explore if are the stablecoins future of crypto.
Early users adopted crypto to tap into the convenience of a decentralized currency that is transparent, cheap, secure, private, and instantaneous. However, cryptocurrency is still no match for traditional money because there is no certainty that the value of the cryptocurrencies that you hold today, will be the same when you wake up the next morning.
This led to the emergence of cryptocurrencies pegged to reserve assets, commonly known as stablecoins.
Stablecoins in the scene
Simply put, stablecoins are a new type of cryptocurrencies that offer low volatility risks and are backed by reserve assets that are expected to remain relatively constant over time, such as the U.S. dollar. Usually, a stablecoin and a reserve asset are pegged at a 1:1 ratio.
A popular example is the USDT, whereby one Tether exchanges for one U.S. dollar. While some of the world-leading currencies back most stablecoins, there are a few that are backed by other cryptocurrencies.
The MakerDAO’s DAI, for example, is pegged on a 1:1 ratio to the U.S. dollar on the exchange rate but is backed by Ethereum reserves. This means that regardless of how much the Ether coin fluctuates on its own, the value of DAI will not affected, because it will remain at the same price as the dollar.
Bitcaribe’s proposal for hedged positions