As the world continues to develop daily, humans are gradually becoming more intellectually endowed, because of the prevalence of knowledge and the insatiable quest to acquire same. Consequently, this deep hunger and search for new knowledge has increased the drive in people to make adjustments to their work lives, in order to attain some level of safety and security in their economic lives.

As a result of this, the world has turned its attention to cryptocurrencies and other digital currencies; and this is the warehouse for Bitcoin, Altcoins, Stable coins, among others. The microscope lens of this article will be centered on stable coins.

When anyone looks upon the word stable, the first thought that would naturally come to mind is stability, which is a firm resistance to change or deterioration or a state where a thing does not fluctuate. In a sense that is correct, but in this context, we will consider what stable coins are all about, why they exist, and how they work.

We cannot talk about stable coins without mentioning cryptocurrencies because they are the midwives that birth stable coins. Cryptocurrency is a digital asset. It is so-called because its transactions are highly encrypted, making the medium of exchange very secure and near impregnable. A cryptocurrency is equated to precious materials like gold and silver and it is created through mining.

Cryptocurrencies have evolved and gone through a process of development and progression and have become very successful since Bitcoin first came into existence in 2009.

A 2019 survey by Kaspersky Lab, a cyber-security firm that operates from Moscow established that  about 20% of people globally have purchased Cryptocurrencies. A study by the same organization in 2018 reveals that there were about 1600 cryptocurrencies in existence, although today we have over 19,000 cryptocurrencies.

WHAT IS A STABLE COIN

A stablecoin is a type of cryptocurrency that relies on a more stable asset as a basis for it’s value. It is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollars or gold. It is a tokenized version of the asset and can be introduced subtly into a blockchain ecosystem to facilitate seamless pass transactions, improved arbitrage and value exchange.

The first stable coin was lauched in July,2014 by two leading figures in the cryptocurrency industry, Dan Larimer (EOS) and Charles Hoskinson (Cardano).

BitUSD was the first stable coin issued as a token on the Bitshare blockchain in 2014. The token was backed by the core token of BitShares, BTS, and was collateralized by a range of other cryptos – all locked in a smart contract to act as collateral.

A stablecoin is also known as a Utility token. This is because it allows you to quickly buy and sell on decentralized exchanges that do not accept fiat currencies. Stable coins allows free and easy trading and exchange as it can also be used in centralized exchanges, although the fiat currencies take a long time to process, but their tokenized counterparts are standard block-chain entities that move quickly.

Unlike other crypto currencies , stablecoins can be used as an everyday currency because it is less prone to fluctuations because they are backed by USD. They can be used as payment for fares, electricity bills, amongst other payables.

Stablecoins have been in the crypto industry since the onset. Stable money is the key to having a free market system. Stablecoins as its nomenclature signifies,  do not appreciate or depreciate in the long run. Investors have found stable coins to be a safe haven for their investment in times of market volatility. It is worthy to note that the unit of measurement for stable coins is one dollar ($1).

There are over 100 stable coins in the crypto market. The following are considered to be the most popular;

TETHER (USDT) 

USDT is the largest and the most widely used stable coin in the crypto market. The stable-value cryptocurrency mirrors the price of the U.S. dollar. It is issued by a Hong Kong-based company Tether. The token’s peg to the US dollar is achieved through the accumulation and maintenance of a balance of various assets, such as commercial paper, cash, fiduciary deposits, and treasury bills in reserves equivalent to USDT in circulating supply. For every USDT minted an equivalent of what is minted must be added to reserve to sustain its peg.

USDT was originally launched in July 2014 as Realcoin, a second-layer cryptocurrency token built on top of Bitcoin’s blockchain through the use of the Omni platform, it was later renamed to USTether, and then, finally, to USDT. 

USDT is known for its high level of security and smooth integration with crypto to fiat platforms.

BINANCE USD (BUSD)

Binance USD (BUSD) is the third-largest stable coin based on market capitalization. It is pegged to the USD on a 1:1 basis. BUSD coin issued by Binance (in partnership with Paxos), is approved and regulated by the New York State Department of Financial Services (NYDFS). BUSD publishes its monthly Audit Report on its official website. BUSD was Launched in Sep 2019. BUSD is a digital currency that aims to meld the stability of the dollar with blockchain technology.

BUSD based on price stability plays an important role in transactions, payments and settlement, and Decentralised Finance (Defi).

TRUE USD (TUSD)

True USD (TUSD), is a stable coin backed by the U.S dollar. It is pegged to the USD at 1:1. TrueUSD is a stable coin launched by the parent company TrustToken, whose co-founder and CEO is Rafael Cosman. TUSD was launched in 2018 . TrueUSD is a fully collateralized, transparently verified, and legally protected ERC-20 token. TrueUSD maintains its peg by holding collateral in bank accounts of different fiduciary partners that have signed escrow agreements.  These bank go through periodic audits and reports are published on them to maintain trust in the project. 

TUSD offers cheaper transaction fees compared to traditional payment services with fiat currency and it also offers a hedge against market volatility.

USD COIN (USDC)

The fourth on the rung is theUSD Coin (USDC). A stable coin founded by Centre Consortium. The Centre Consortium has two founding members. One of them is the peer-to-peer payment services company Circle, while the other is one of the largest crypto exchanges Coinbase.

TYPES OF STABLE COINS

There are four main categories of Stablecoins:

1. The Fiat- Collateralized Stablecoins:
These are the most common types of Stablecoins. It is pegged at a 1:1 ratio meaning the stable coin can be issued and exchanged  by depositing an equal amount of fiat in its reserve. It is backed by sovereign legal tenders of countries. e.g USD, EUR, GBP. For each stable coin that exist there is an equivalent of fait currency held in reserve to back it up.

Benefits

• Structure is simplified and it is considered stable because of its treasury reserve.

Disadvantages

• Regular audits and report needed to sustain trust
• Risk of hacks, security breach and bankruptcy

2. Commodity-based stablecoins :

As the name implies, it is based on commodities. This stablecoins are backed by reserved assets other than fiat currencies. It is collateralized using a physical asset. The most used asset for this type of Stablecoins is gold. Holders of this stablecoins are essentially exposed to the value of real-world assets.

Benefits

• Commodity tokenization brings liquidity to the market.
• Real assets provide backing. It enhances trust and stability.

Disadvantages

• Regular audits and reports needed to sustain trust and authenticity.
• Risk of hacks, security breach and bankruptcy.

3. Crypto-backed Stablecoins :

These stablecoins are backed by other cryptocurrencies. They are stablecoins that must be collateralized due to the volatile nature of cryptocurrencies.The token used to back the stablecoin uses a ‘security pledge’ to compensate for the price fluctuation. Since the token can’t hold its peg, it doesn’t have a 1:1 ratio for the collateral crypto; for instance, a crypto-backed token pegged to the US dollar will have approximately $2 peg for each stablecoin issued.

Benefits

• Records are maintained on the blockchain.
• It is decentralized and does not require a custodian.
• No audits required.

Disadvantages

• Structure is complex

4. Algorithmic stablecoins :
They are non-backed stablecoins in which prices, token and other variables are manipulated with the help of special algorithms, software,and codes in order to better manage supply and demand because this strategy allows the company to maintain the reserve peg in the event of price fluctuations. Stablecoins have their limitations as they may lose value if the company goes bankrupt.

It is critical for the issuers to declare solvency to maintain trust in the coin and its value. The value of Stablecoins is based on people’s trust in the company holding the collateralized reserve asset and that trust may waver on occasion.

Benefits

• Trustworthy system as coins is built on smart contracts.
• It is decentralized. 

Disadvantages

• Complex mechanism and structure. Mostly untested and proven.
• Sustainability is not guaranteed due to dynamic nature of the market and investor bias.

What determines the price of other coins is the rate of demand and supply among other factors but what determines the price of stable coins, is the foreign exchange rate of the dollar with the investor’s domiciled country’s currency. In Nigeria for instance, it costs about ₦590 to get one stable coin, which is the current exchange rate of the Naira to the Dollar (price is however subject to change).

STABLE COINS AND FIAT CURRENCY

A major dynamic in the ownership and investment in stable coins is the degree of fluctuations in the exchange rate between the currency of the home country where an investor trades and the dollar.

In the Nigerian case, if you want to get a USDT currency in Nigeria, it is within the range of ₦590.

So, assuming you were able to get 100 USDT at the rate of ₦590 and suddenly the value of the naira appreciates slightly over the dollar and the exchange rate falls from N590 to N550, the resultant effect of this is that if you want to sell your coin at that moment, you have to sell it at ₦550, because of the automatic fall in the exchange rate of naira to the dollar.

This is a very important twist in the plot of stable coins which must be observed when making trading decisions. Although in relation to the Naira, the dollar rarely depreciates in this current state of the economy.

THE FUTURE

Stable coins give investors the best of both worlds – a stable asset within the crypto space, a cheap and fast means of payment. It is the evolution of traditional payment and it possesses the potential of changing the global payment landscape.