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What is Stablecoins? How is It Works?

Hi, I’m Nate Martin from 99 Bitcoins.com and welcome to crypto whiteboard Tuesday where we take complex cryptocurrency topics break them down and translate them into plain English before we begin don’t forget to subscribe to the channel and click that Bell. So you will immediately get notified when a new video comes out.

Today’s topic is stablecoins most cryptocurrencies were meant to serve as a medium of exchange and not just a store of value. The problem is that due to their relatively small market cap even pillar crypto currencies like Bitcoin tend to experience wide fluctuations in price. Usually the smaller a market cap an asset has the more volatile its price will be imagine throwing a rock into a small pond now take the same Rock and throw it into the ocean. Clearly The Rock will have a much more of an effect on the pot then on the ocean in the same manner. The crypto currency market cap is a small pond for now and is more affected by every day buy and sell orders then say for example, the US dollar this creates a major issue since You can’t enjoy the benefits of cryptocurrencies which include the decentralisation of money and a free-for-all payment system without the value of volatility that accompanies it.

Imagine how hard it is to use Bitcoin or any other cryptocurrency for day-to-day transactions and trading purposes when one day is worth X and the next day it’s worth half that just think what it feels like to be the guy who bought two pizzas for 10,000 Bitcoins eight years ago. That’s exactly where stable coins come in. Simply put stable coins are an attempt to create a currency that isn’t volatile a stable coins value is pegged to a real-world currency also known as a fiat currency, for example, the stablecoin known as tether or USDT is worth one US dollar and is expected to maintain this Peg no matter what stable coins allow for the convenience of cryptocurrency, which means fast Selman and fewer regulatory hurdles along with the stability of Fiat currencies, like most coins the most obvious use case would be to use them as a medium of exchange for Day-to-day purchases but since these coins aren’t very popular at the moment.

No one really accepts them as a payment method. So the main usage of stable coins today is actually on crypto currency exchanges using stable coins Traders can trade volatile cryptocurrencies first stable cryptocurrencies when they want to lower their risk, for example, if I’m invested in Bitcoin, and I don’t want to risk the price of Bitcoin falling against the US dollar. I can just exchange my Bitcoins for USD tea and retain my dollar value once I

To get back into the game and hold Bitcoins. I can just exchange my USD T back to BTC. This method is extremely popular with crypto only exchanges that don’t Supply their users with the option to exchange Bitcoin for Fiat currencies due to regulation another great advantage of stable coins is that you can move funds between exchanges relatively quickly since crypto transactions are faster and cheaper than Fiat transactions the option for such a fast settlement between exchanges makes arbitraging more convenient and close. Has the price gaps that you usually see between Bitcoin exchanges. So for now stable coins are more of a utility coin for Traders than an actual medium of exchange. But how are they made possible what keeps their price from the volatility that other cryptocurrencies experienced? Well, there are several ways a company can try and maintain its table coins Peg to a fiat currency. The first way to maintain a peg is by creating trust that the coin is actually worth what it is pegged to for example, if the market doesn’t believe that 1 USD

Is really worth $1 people will immediately dump all of their us DT and the price will crash in order to maintain this trust the company backs his coins with some sort of asset. This collateral is basically proof that the company is good for its word and that is coins should actually be worth the pegged amount for example in tethers case each u.s. DT is said to be backed by an actual US dollar that tether holds as collateral a different example for collateral is the DGX token that is said to be backed by A gold another version of a collateralized stable coin is one that is backed by one or more cryptocurrencies. This form of collateral is much easier to audit since a company’s balance can be viewed on the blockchain the second way to maintain a peg is by manipulating the coin Supply on the market also known as an algorithmic Peg an algorithmic Peg means the company writes a set of rules and also known as a smart contract that increases or decreases the amount of a stable coin in circulation, depending on the coins price. Let me

Flame imagine we have a stable coin that is pegged to the u.s. Dollar through an algorithmic. Act assuming a lot of people were to start buying the coin its price would rise and the peg will be broken to prevent this from happening new coins are issued this increase in Supply alleviates the price pressure created by the demand and maintains the coins value. If on the other hand many people start selling the coin coins are removed from the overall Supply in order to hold the price tag to one US dollar to be clear algorithmically Peg stablecoins. Don’t hold any assets as collateral the smart contract. That manages the coin acts as a central bank it tries to manipulate the price back to the peg by changing the money supply.

There are pros and cons for each pegging method Fiat collateralized pegs transmit. The highest degree of certainty to stable coin holders that the coin is indeed worth the asset. It is backed by however Fiat collateralized pegs have some major cons for one from the company standpoint. The acid is frozen and can’t be used for anything else. Also. There’s always the risk of embezzlement.

The closing of the company’s bank account which can ruin the trust in the stable coin. Another issue with Fiat collateralized stable coins is that it’s hard to actually prove the company owns enough of the asset to relieve back the amount of coins in circulation tether for example has suffered severe criticism and audit request from Skeptics claim in the company doesn’t have enough collateral to back the USDT in circulation crypto collateralized coins on the other hand may have the benefit of viewing the collateral on the blockchain but the collateral itself is extremely volatile. And that’s why a premium is needed in many cases that company will hold a hundred and fifty percent or even more of the collateral needed to make up for possible drops in the crypto currency prices algorithmic taking benefits from the fact that the company doesn’t need to hold any asset on hand. However, many will argue that algorithmic pecking Theory doesn’t really work in real life since manipulating the money supply isn’t a guarantee the peg will hold with all of the complexities and maintaining a stable coins Peg.

You might be wondering what’s the incentive to create able to win in the first place. What’s the business model? Well for each company, there’s a different incentive. Some companies can charge a fee for trading their coin other companies use their stable coin as a marketing channel to raise awareness to the company and other services it offers OB Gemini coinbase and circle our exchanges that have created their own stable coins in order to attract more users to their trading platforms and allow easier transition of funds within and between exchanges. Let’s take a moment to go over some examples of the more popular stable coins in use today. Today USDT or USD tether, which I’ve already mentioned is a Fiat collateralized stable coin that is pegged to the u.s. Dollar. The coin was created by the company tether and has remained relatively stable since its introduction in 2015

TUSD not to be confused with USDT stands for True USD and is a relatively new Fiat collateralized stable coin that attempts to address the criticism directed at tether collateral US dollars are held in the bank accounts of multiple trust companies. These bank accounts are published every day and are subject to monthly audits.

G USD also known as Gemini USD is a Fiat collateralized stable coin issued by the popular crypto exchange Gemini, which was established by the Winklevoss brothers. According to Gemini, GUSD is the first regulated stable coin in the world.

USDC which stands for USD coin is a Fiat collateralized stable coin issued by Circle and coinbase and finally Dai is a stable coin created. By maker doll that is crypto collateralized.

There’s a lot of criticism going on about the creation of stable coins. The most common one is related to the inability of actually maintaining the peg in the long run. This could be due to any one of the reasons I’ve mentioned before on top of that a quick look at history tells us that all pegged currencies are doomed to fail due to the cost of maintaining them, especially when that Peg comes under attack some well known examples where pegs were broken are the Swiss franc pegged to the euro in 2015. The US dollar in 2005 the Thai baht pegged to the u.s. Dollar in 1997 and the most famous of them all the gold standard pegging the US dollar to gold in 1971.

But the bigger question here is the issue of governance stable coins are considered by many to be centralized due to the fact that there is a company behind them that maintains the peg whether it be algorithmic or collateralized. Therefore stable coins aren’t really cryptocurrencies in the sense that they aren’t decentralized another issue is that the coins seem to be providing a solution to something that is just a growing pain and not a constant problem. Once cryptocurrencies achieve a higher market cap, their volatility will reduce dramatically and there will be no real use for stable coins stable coins are trying to get the best of both worlds the stability of an established currency with a large market and the flexibility of a decentralized free-for-all cryptocurrency. The problem is that they also get the worst of Both Worlds a centralized coin with a sort of Central Bank controlling it and the question.

Nation will Regulators allow companies to create an asset that mimics legal tender without any oversight one example for such an issue is basis and algorithmically Peg stable coin that raised over a hundred and thirty million dollars for its project just to shut down due to regulatory issues down too long ago. It seems like stable coins are some sort of a temporary utility for exchanges allowing Traders a Haven out of volatility without needing to supply them with a regulated Fiat option in the long run. It’s hard to be sure how or whether these coins will have a place in. The crypto ecosystem especially with so many question marks surrounding them. Well, that’s it for today’s episode of crypto whiteboard.