Stablecoins - tl;dr

Overview

• Stablecoins are designed to be cryptocurrencies without the volatility. Meaning one unit of a stablecoin typically equals one unit of some other "real", fiat currency like the US Dollar or EURO.

• Stablecoins are designed to dramatically reduce volatility relative to other, unpegged cryptocurrencies like Bitcoin.

• Stablecoins pursue price stability by reserving assets as collateral or by using algorithms that control the supply of the stablecoin.

What Does This Mean?

• speed, privacy, and programmability of cryptocurrencies with the stability of government-issued fiat currency

  • no bank account
  • cheap transfers
  • can travel through the web all over the world, and be accessible in places where cold hard cash is not

• purchasing power is maintained relative to pegged asset

  • imagine if 2 pizzas cost 10k Bitcoin 10 years ago and still cost that much today.

How Does This Work?

• Stablecoins are cryptocurrencies that attempt to peg their value to some external "stable" asset in reserve like the US Dollar, or other national currency, or a commodity like the price of gold that serves as collatoral for the stablecoin.

• There are several types of stablecoins to consider

• fiat-collaterized

  • reserve of fiat currency assuring stablecoin's value
  • gold, oil, reserves of USD, EURO, etc.
  • reserves are regulated and audited and publicly verified by independent custodians like accounting firms

• crypto-collaterized

  • larger amount of crypto in reserve than issued stablecoins
    • Let's say I issue $1 million dollars worth of Ben stablecoins. And I back them with $3 million dollars worth of some other cryptocurrency in reserve.
    • That means the crypto I'm pegging Ben Stablecoins to could lose up to 66% of its value, and, in theory, my Ben Stablecoin will still be worth that initial $1 million dollars.
    • The crypto I'm pegging Ben Stablecoin to could also triple and be worth $9 million dollars, but my Ben Stablecoin will still be worth that initial $1 million dollars.

• algorithmic stablecoins

  • may or may not hold a reserve, meaning they could be non-collatorized
  • stability is maintained by an algorithm, which contols the supply of stablecoins.

Possibilities

• safe store of cash for anyone, anywhere in the world without having to interact with a traditional financial system is very empowering and can help to quickly and securely send financial aid to areas in crisis.

• greater scrutiny from regulators could possibly help build more trust in stablecoins.

  • token holders should be able to cash out with the equivalent in fiat currency at any time
  • but it's unclear how regulation would affect some of the foundational principles of decentralization like access for all

• Double-collaterized currencies like USN, are pegged to two different currencies in order to maintain its 1-to-1 value, or parity with the US Dollar in any market cycle.

Conclusions

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