Stablecoins - tl;dr

# Stablecoins - tl;dr Welcome to tldr with me, Ben Today we will be covering Stablecoins. What are they? How do they work? Should I HODL? - It's pronounced "huddle", and you should ask your quarterback or team captain.  Now before we get started, I am NOT a financial advisor!  This is an educational series focused on the technology underlying blockchain.  I don't offer financial advise or talk about price predictions or any of that stuff. ## 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 be just as stable as the currency they are pegged to, unlike more prominent crypto currencies like Bitcoin . - Stablecoins can pursue price stability by reserving assets as collateral or by using algorithms that control the supply of the stablecoin. ## What Does This Mean? - you get the speed, privacy, and programmability of cryptocurrencies with the stability of government-issued fiat currency - no bank account is necessary - super cheap transfers - it can travel all over the world through the internet, and be accessible in places where cold hard cash is not - purchasing power is maintained - A pizza has cost about the same for the last 20 years or so, right? - That's because the dollar has more or less maintained its purchasing power over time. It's stable - But when Bitcoin first came out, someone famously paid 10K Bitcoin for 2 pizzas. Today, 10K Bitcoin could buy you an entire pizzaria. ## How Does This Work? - Stablecoins are cryptocurrencies that commonly attempt to "peg" their value to some external "stable" asset in reserve that can be used as collatoral if needed. - This collatoral could be a reserve of US Dollars, or other national currency. - It could be a commodity like gold or silver. - Or it could be something more abstract like debt, or credit - It could even have no collatoral at all, and instead use an algorithm to stabilize price by controlling the supply of the stablecoin. ### There are several experiments with different pegging models and treasury designs that have been ongoing for the last few years. #### fiat-collateralized - This is probably your most common type of stablecoin. - It means there's a reserve of fiat currency assuring the stablecoin's value - think gold, oil, reserves of USD, EURO, etc. - the value of these don't fluctuate too much over time. - These reserves are regulated, audited and publicly verified by independent custodians like accounting firms #### crypto-collaterized - This means the stablecoin is backed by another cryptocurrency, and there's generally a larger value of crypto **in reserve** than issued stablecoins - Let's say I issue $1 million dollars worth of Ben stablecoins that we'll call USD-B. And I back them with $3 million dollars worth of some other cryptocurrency in reserve. - That means the crypto I'm pegging USD-B to could lose up to 66% of its value, and, in theory, USD-B will still be worth that initial $1 million dollars. - The crypto I'm pegging USD-B to could also triple and be worth $9 million dollars, but my USD-B will still be worth that initial $1 million dollars. #### algorithmic stablecoins - may or may not hold a reserve, meaning they could be **non-collatoralized** - the supply of stablecoins is managed by an algorithm - If the stablecoin's value goes down, the algorithm reduces the supply of stablecoins. - If the value goes up, the algorithm issues more stablecoins. ## Possibilities - stablecoins are designed to offer a safe store of cash that retains its purchasing power over time. - It's empowering, because anyone, anywhere in the world can use stablecoins without having to interact with any traditional financial system. - This means financial aid can be sent quickly and securely to areas in crisis. - greater regulatory and policy-level dialogue could possibly help build more trust in stablecoins. - token holders should be able to "cash out" at any time, just like they would with a traditional bank. - but it's unclear how regulation would affect some of the foundational principles of decentralization like access for all. - That's why it must start with dialogue and transparency. - Continued experimentation could lead to greater innovations in how stablecoins avoid volatility. - For instance, the "double-collaterized" USN, is pegged to two different currencies in order to maintain its 1-to-1 value, or parity with the US Dollar in any market cycle. - It's impossible to predict whether experiments like this will pay off, but the technology driving these efforts gives you access to a new and useful set of tools.  ## Conclusions Thank you for watching this installment of tldr. Please let me know what you think in the comments, and Until next time, I'll see you on chain! ###### tags: `tldr` `content`