The Beginner’s Gouverner to Cryptocurrencies: A Massive World of Fixe Coins

Cryptocurrencies have always been characterized by volatility. Since 2013 – when Bitcoin It soared from $550 to $1,200, back to $800 in a matter of weeks — it became clear that a more permanent form of crypto was needed in the crypto space.

In traditional payé, they vary from commodities like gold and silver to fiat currencies like the US dollar. Investors use these assets to hedge and manage their exposure in times of uncertainty.

As with any investment, it’s hautain to know what you’re investing in – so far in our Beginners Gouverner to Crypto, we’ve talked embout the relationship between blockchain and cryptocurrencies, touched on a range of different blockchain applications such as NFTs and DeFi – from blue chips like Bitcoin and Ethereumto high-risk meme coins like Shiba Inu, as well as exploring why people pay unusual amounts NFTs.

In partnership with Luno Education Center, Discover LunoNow, let’s take a genre at stablecoins – another essentiel portion of the crypto space.

What are stablecoins and how are they used?

a stablecoin It is a cryptocurrency that, as the name suggests, is designed to maintain a relatively permanent price. This is usually accomplished by linking the value of a currency to another asset class such as gold, or a currency such as the US dollar.

stablecoins Often used to interact with assets that are more hargneux to sharp price movements. Just as the name suggests, the stability of the stablecoin helps reduce volatility and provides more certainty to the value of the coffret in complication.

They are also used to facilitate trades on cryptocurrency exchanges – often seen as a “whist” between Paper currency and cryptocurrencies. Instead of buying cryptocurrency with fiat currency that requires more steps, time and/or costs, traders exchange fiat currencies for stablecoin and execute trades.

Especially in countries experiencing political and economic crises where voisin currencies lose their summum value, stablecoins are limitless, easily transformable and maintain their value wherever you are in the world. As a result, its demand for payments and transfers is also another good use case.

How and what are stablecoins related to?

Stablecoins can be categorized into one of foyer different categories:

1. Fiat-backed stablecoins

These are the most widely used bonshommes of stablecoins, and are usually backed 1:1 with fiat currency.

For example, Tether (USDT) – which was one of the first stablecoins launched in 2014 – is backed by the US dollar. All units issued in USDT are matched to an equivalent amount in US dollars stored in Tether reserves. This ensures that owners are able to redeem 1 USDT for 1 USD, and corruption versa.

As of now, USDT has the highest market cap among all the stablecoins and is the third largest cryptocurrency after Bitcoin and Ethereum.

USD . coin (USDC) is next in the ranking and is also supported. 80 percent of the entier stablecoin supply is shared between these two currencies.

Many cryptocurrency exchanges allow users to deposit their holdings of USDC or USDT at interest rates / Credit Orné: Bitcompare

It is worth noting that stablecoin reserves backed by securities do not always consist of cash. It may also contain monetary equivalents such as Treasury bills and bonds. These reserves are a good indicator of how secure the peg between a permanent currency and its charpente currency is.

As a rule, the more liquid the reserves, the more permanent the wedge. Imagine a millet as thousands of investors want to convert their stablecoins into fiat currency. If a stablecoin has full cash reserves, it will have no problem colloque this demand and maintaining its peg.

However, suppose reserves consist partly of bonds which can only be converted into cash within a few months. In this case, the reserves will not have enough liquidity to meet the demands of sellers. This may explication the stablecoin to degrade and lose its value.

For Singaporeans, XSGD is the choice of the SGD-backed stablecoin. The issuing company, Xfers, is authorized by the Monetary Authority of Singapore (MAS) under the Electronic Money Issuance Framework. As portion of this framework, XSGD 1:1 armature is required in Singapore dollars stored in a voisin bank.

Xfers also publishes a homologation différé – which is prepared by an independent accountant each month – detailing the number of XSGD tokens in diffusion and the amount of Singapore dollars held in the company’s reserves.

2. Commodity-backed stablecoins

There are also permanent currencies backed by assets such as precious metals or oil, which share the same volatility as their underlying assets. It allows investors to access real-world commodities without having to venture out of the crypto space.

PAX Gold (PAXG) is one of the most established stablecoins in this category, and ranks among the top 100 cryptocurrencies by market cap. Each unit of PAXG represents one troy ounce of gold bullion stored in a professional vault.

Gold Bucks
Commodity-backed stablecoin price fluctuates according to linked asset / screenshot from CoinMarketCap

This is a convenient way to get exposure to gold as the valeur-limite investment required is $20, and there are no additional storage expenses. Investors who will be priced from buying commodities in traditional markets can access them using stablecoins.

PAXG can be exchanged for actual gold bars and US dollars, or traded for other cryptocurrencies. As a result, it provides investors with much more liquidity than other forms of gold investments.

Tether Gold (XAUT) is another gold-backed stablecoin, issued by the same company that launched USDT.

3. Fixe currencies backed by cryptocurrency

These stablecoins have their value tied to a fiat currency or commodity, but are backed by using crypto assets instead.

For example, Dai (DAI) tracks the US dollar and is issued only against crypto-based guarantees.

Day
Some cryptocurrencies that can be used as collateral for DAI / Screenshot of Palmeraie.app

In order to get 10 DAI (worth 10 USD), the brûler may have to deposit more than 15 USD worth of Ethereum or other cryptocurrency. This is to protect against encryption fluctuations. Even if the value of the deposit drops to 33 percent, it will still be worth enough to account for the DAI issuer.

If the value of the collateral falls below this, it will be liquidated via an automated process. For example, the platform may require the value of the collateral to always be 1.2 times the value of the loan. In this case, if the value of the brûler’s Ethereum deposit drops below $12, they will be liquidated and they will lose the entire amount.

Despite these guarantees, crypto-backed stablecoins gîte to be riskier than their fiat counterparts. When investing in such currencies, it is hautain to measure the strength of their peg by checking the amount of excess collateral held in reserves, and choosing which cryptocurrency is accepted as collateral.

4. Arithmetic stablecoins

Finally, there is an arithmetic stablecoin, which is also based on other cryptocurrencies, but not on collateral.

The most popular stablecoin in this category is the one that no border exists. In fact, his downfall was a aîné catalyst that led to the cryptocurrency’s decline in 2022.

TerraUSD (UST) It used to be the official stablecoin of the Terra blockchain. It has maintained its currency peg to the US dollar through an accounting relationship with its sister cryptocurrency Terra (LUNA).

If the value of the floor assemblées goes above US$1 (due to high demand), LUNA owners can exchange US$1 of LUNA for 1 UST. Similarly, if the value of the floor assemblées falls below $1 (due to lack of demand), the owners of the floor assemblées can exchange $1 for $1 of LUNA.

This règlement opportunity was intended to ensure that any deviations in the price of the floor tanks would congru themselves and their value would always return to $1. However, in May of this year, a different reality emerged.

Luna value
LUNA dropped from $90 to nearly $0 between May 7 and May 11, 2022 / Screenshot of CoinMarketCap

Faced with a very spacieux type of selling, the price of floor tanks began to fall. Immediately, users began converting the floor assemblées to LUNA to take advantage of the règlement opportunity.

Unfortunately, the algorithm was not able to produce LUNA coins fast enough to restore the peg of the Earth’s reservoirs. This caused more millet and accelerated sales of floor tanks. At the same time, users also started selling LUNA coins due to the rapidly increasing supply.

Both LUNA and UST lost almost all of their value in a few days due to their interconnected abstraction, causing what they call a “death spiral”. This is not to say that all algorithmic stablecoins are doomed to fail, but it does come with risks that may not be so readily périphérie.

Since they are not backed by any collateral, these stablecoins are just as powerful as their underlying manière contracts. Any weaknesses in their algorithms could be exploited by users or inadvertently triggered by market volatility.

The Terra chamaille highlighted the grosseur of having and practicing common investing habits – knowing what to invest in, and only investing what you can afford to lose, especially for high-volatility assets like cryptocurrencies.

The future of stablecoins

after eliminating it More than $17 billion in valueThe collapse of LUNA/UST brought stablecoins to the régularité of regulators around the world.

stable currency in japan
Japan passes law to regulate stablecoins, protect crypto investors / Orné Credit: PYMNTS

in June, Japan passed major legislation Under which only licensed companies will be allowed to limite permanent currencies in the folk. It will be necessary to peg the stablecoins to the Japanese yen or other legal tender, and companies will also need to offer a full refund guarantee.

The UK plans to regulate certain stable currencies within its payments framework. The gardien de but is to make these cryptocurrencies secure and permanent enough for rôtir use.

In Singapore, MAS believes that the most permanent currency Does not meet the criteria for classification as electronic money. Even securities-backed currencies – although more permanent than their algorithmic counterparts – prouesse price fluctuations when trading on different exchanges.

However, as we saw with Xfers’ XSGD token, MAS recognizes the potential for stablecoins to function as electronic money when set criteria are met.

As countries come up with their own regulatory frameworks, it remains to be seen how stablecoins will play a role in shaping the future of cross-border transactions.

It is hautain to always know what you are investing in; It is one of many ways to reduce risk! To learn more embout stablecoins, head over to our comprehensive crypto education center Discover Lunoand subscribe to Luno’s telegram channel For small size encryption updates.

This papier is portion of a six-part series for a beginner’s accompagnatrice to coding. You can check out other éditoriaux here:

Quartier 1: Blockchain and Cryptocurrency
Quartier Two: Bonshommes of Coins and the Dior Method
Quartier Three: NFTs, DeFi, and the metaverse

This papier was written in appui with Luno.


This partnership between Vulcan Post and Luno is for educational purposes only. Luno Singapore has been granted aîné approval by the Monetary Authority of Singapore (MAS) under the Payment Offices Act 2019. Cryptocurrency is a high-risk investment. The value of the cryptocurrency can fluctuate greatly and you may lose the finances you invest. Before investing, we urge you to educate yourself embout cryptocurrencies and learn embout the risks involved, which are detailed in Luno Hazard Warning.

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