Have you owned any decentralized stablecoins? Many cryptocurrency enthusiasts like the idea of having decentralized stablecoins in their portfolios. Such coins have values that mimic fiat currencies, most notably the US dollar. These coins solve the problem of volatility that is characteristic of most cryptocurrencies today.
In this post, we’ll give you a quick guide on what decentralized stablecoins are, how they work, and their pros, cons, and uses. You can then determine if it’s a good idea for you to include decentralized stablecoins in your crypto investments and transactions.
What Are Stablecoins?
Let’s define stablecoins first to understand how its decentralized counterpart works.
Stablecoins in general are digital assets that have values similar to fiat currencies. This main characteristic paved the way for them to be tagged as “stable”. Notable examples of these coins include Tether (USDT), Gemini Dollar (GUSD), and trueUSD (TUSD).
Most stablecoins work well for transactional use. This is because their values are not as volatile and don’t fluctuate as much as typical cryptos do.
There are three main types of stablecoins, each with different methods of how their values are pegged:
- Currency-backed stablecoins – These are stablecoins with a fiat currency backing in a 1:1 ratio. Banks or central issuers hold a certain amount of currency and issues crypto tokens with a proportionate worth.
- Cryptocurrency-backed stablecoins – These coins use cryptocurrencies as their collateral. The token issuance and unit worth are handled by smart contracts. Crypto-backed stablecoins keep their prices stable through a combination of on-chain algorithms and game theory.
Algorithmic stablecoins – Smart contracts and algorithms govern token issuance and values assignment of algorithmic stablecoins. They also use monetary policies to regulate the coin movement, almost similar to what central banks use. Such coins are also called seigniorage-style coins (seigniorage: profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs).
Backed stablecoins (currency and crypto-backed) are the most popular stablecoins used by traders, entrepreneurs, and enthusiasts.
As its name implies, decentralized stablecoins are not owned nor controlled by any entity. Most decentralized stablecoins have values that aren’t exclusively pegged to fiat currencies but may also include real-world assets such as:
- Precious metals
- Industrial metals
The cryptocurrency-backed stablecoin fits all the requirements of a decentralized stablecoin. It is based on a blockchain ecosystem, runs on smart contracts, and is not controlled by any issuer, bank, or company. No intermediary is needed to issue the coins and back them up with cryptocurrency collateral.
Decentralized Stablecoins Pros, Cons, and Uses
Decentralized stablecoins are preferred by many traders in their transactions. This is due to the coins’ value being relatively stable as compared to the typical cryptocurrencies’ volatility and unpredictable value fluctuations.
These coins can also be used for investments. However, you can’t get many profits from stablecoins as compared to the typical cryptocurrencies.
Here are the pros and cons of using decentralized stablecoins:
- Bypasses the volatility of traditional cryptocurrencies
- Lower costs for transferring a fiat currency to a blockchain-based stablecoin
- Lesser risk of losing money values due to crypto fluctuation
- Allows direct peer-to-peer transactions and payments
- Provides automated transaction verifications
- More transparent coded policies that cannot be easily interfered or changed by humans
- Makes transactions safer, secured, and more anonymous compared to centralized coins
- May be hard to implement in real-world situations where fiats are often used
- Poses lower profits for traders who are used to investing and earning high amounts from typical cryptos
- Stabilization of the coins’ values can become quite complicated
In a Nutshell
Decentralized stablecoins are dubbed as the less volatile cryptocurrency solution. They’re created to provide a level of stability almost comparable to fiat currencies, preventing huge losses from transactions and trades done with a cryptocurrency.
If you’re looking for coins that can handle peer-to-peer transactions, are safe, and provides a degree of anonymity, then using decentralized stablecoins might be a solution for you. Want to learn more? Download a free Crytpo Guide for Beginners here.
Originally published in ACCOINTING.com. To find out more, visit www.acccointing.com.