In the cryptocurrency market, stablecoins are an important part of it. Most people need stablecoins for transactions in the market. They can buy and sell Bitcoin, Ethereum and other currencies through stablecoins, and realize legal currency exchange.
With the development of the cryptocurrency market, the status of stablecoins is getting higher and higher. The market value has grown rapidly from one billion at the beginning to more than 20 billion now, and it is still growing rapidly. Given the importance of stablecoins, today Morecoin will analyze stablecoins in depth.
What is a stable coin
Stable currency is a type of cryptocurrency, but unlike most digital currencies, the value of stable currency is linked to the legal currency of one or more countries, and some stable currencies are linked to physical assets. Therefore, stablecoins are cryptocurrencies whose value is backed by one or more financial assets.
Types of stablecoins
The category of stablecoins is based on assets that support the value of stablecoins. According to the existing stable currency types, it can be divided into legal currency mortgage stable currency and encrypted asset mortgage stable currency.
Legal currency mortgage stable currency
The most common type of stable currency is dominant in stable currency. The value of these stablecoins is backed by one or more legal currencies. The most popular fiat currencies used here are the U.S. dollar, euro and pound sterling.
Each legal currency mortgaged stable currency is linked to the corresponding legal currency at a 1:1 ratio. For every stable currency in circulation, an equal amount of legal currency is needed to support it. For example, someone has a stablecoin backed by 100 dollars, and now he wants to exchange the stablecoin for dollars. Therefore, the company that manages the stablecoin will transfer $100 into his bank account through their reserves.
The representative of this type of stable currency is USDT. USDT is a token based on the stable value currency U.S. dollar launched by Tether. 1USDT = 1 U.S. dollar. Although Tether claims to strictly abide by the 1:1 reserve guarantee, that is, for every USDT token issued, its bank account will have 1 U.S. dollar. However, the market is still worried about its risks. The biggest risk is that the issuance of Tether is completely centralized, that is, the issuance, acceptance, regulatory risks, and operational risks are all concentrated in the Tether company itself.
Encrypted asset mortgage stable currency
Crypto-asset-backed stablecoins are backed by major cryptocurrencies such as Bitcoin and Ethereum. These types of stablecoins are more decentralized, of which over-collateralization is a major feature. Why do you say that? Because it plays a role in hedging the risk of price fluctuations, and helps encrypted assets mortgage stablecoins to absorb price fluctuations.
For example, to obtain $100 worth of encrypted assets collateralized stablecoins, you must deposit $150 worth of ETH. As you can see here, its mortgage rate is 150%. Now, even if the price of the underlying asset falls, the stablecoin can withstand the price depreciation. But if the price drop is low enough, the system will automatically liquidate the stablecoin.
The most popular crypto asset mortgage stablecoin on the market is MakerDAO's DAI, whose value is backed by multiple crypto assets such as ETH. The face value of DAI is linked to the U.S. dollar, and the pledged ETH is held in the form of a smart contract. Smart contracts will be automatically executed to control the price of DAI. All work is done by MakerDAO's algorithm, which means that the algorithm manages the price of DAI.
DAI is the core part of the MakerDAO lending platform. All MakerDAO users need DAI to borrow and repay. DAI will only be generated when one borrows from the MakerDAO platform. Once the loan is paid off, DAI will be destroyed.
Why are stablecoins so important?
Stable coins play a very important role in the cryptocurrency market, and to a certain extent they act as a bridge between cryptocurrencies. At the same time, traders and crypto enthusiasts who are afraid of the volatility of cryptocurrencies can participate in the crypto industry through stable coins in. They can hold stablecoins because they are not as volatile as other cryptocurrencies.
Moreover, driven by the rapid growth of the decentralized financial DeFi field this year, stablecoins are now regarded by industry insiders as the most important field in the development of the encryption industry.
At the same time, decentralized stablecoins have great advantages in anti-inflation and preservation of value. You can compare USDT. If the U.S. dollar may eventually depreciate by 35%, this means that the USDT anchored to the legal currency of the U.S. dollar will depreciate by 35% simultaneously, exceeding 1/ The value of 3 will be wiped out. And this kind of situation will not happen in decentralized stablecoins, because if stablecoins are issued as collateralized bitcoins, then the anti-inflation properties of bitcoin will naturally be transmitted to the stablecoins, making stablecoins anti-inflationary .
Conclusion
Up to now, fiat-collateralized stablecoins have occupied the largest market share in the cryptocurrency market. However, decentralized stablecoins are closely following the legal currency mortgage stablecoins, and decentralized stablecoins are gradually increasing their market share.
Morecoin believes that decentralized stablecoins will continue to grow. With the increasing popularity of DeFi, it is only a matter of time before decentralized stablecoins surpass fiat-collateralized stablecoins in the market. As a one-stop digital asset financial service platform, Morecoin will track industry development in real time, capture market signals in time, analyze data indicators in depth, and provide cryptocurrency users with better and higher-quality industry information and product services.