Bitcoin (BTC) and other cryptocurrencies have opened doors to a whole new world of finance. In its simplest form, cryptocurrency allows people to transact in a completely unreliable, transparent and efficient way that eliminates the risk of key intermediaries and counterparties that were previously associated with digital money transfers.

Thanks to blockchain technology, value can now be transferred globally in seconds / minutes and with relatively low fees, but that’s not all. However, Bitcoin and Ether (ETH) remain too volatile to be used as a currency, which hinders their collective adoption.

While Bitcoin and blockchain technologies are still in their infancy, the industry is still dominated by volatility, creating something that combines the best of both worlds – stable currencies. Popular examples include Tether (USDT) and USD Coin (USDC).

While cryptocurrencies themselves are volatile, the underlying technology can be used to create assets tied to more stable assets such as fiat currencies, precious metals, and more. These coins are mainly used for exchange rate additions and adjustments. Some banknotes have become very popular because they are pegged to the US dollar and have reached a market value of over $ 51 billion against the US dollar and about $ 14 billion below the US dollar backed by Coinbase.

Stable currencies have become an asset class of their own as their popularity is growing among both retail and institutional demographic groups due to their unique characteristics. Now the decentralized economy and non-fungible tokens in the industry are changing, and together with a stable currency, exciting new opportunities for financial inclusion are opening up.

Centralized and decentralized stablecoins
The concept of currencies like USDT is simple. In theory, the companies that support these stable cryptocurrencies have a reserve for the underlying asset – in this case the US dollar – and issue the same number of blockchain-based tokens.

However, stable currencies have their own problems. The most common problem is that stablecoin issuers can manipulate their reserves and reviews to issue unsupported tokens. While iFinex – the leading cryptocurrency exchange Bitfinex and issuer of USDT – is adamant that USDT is always 100% backed by reserves, some in the industry remain skeptical, as evidenced by the recent lawsuit between the New York State Law Office and Tether.

These challenges have prompted developers and entrepreneurs in space to build stable decentralized systems, the most famous of which is MakerDAO and its associated dollar symbol Dai. MakerDAO Ether (ETH) is used to create a managed decentralized reserve for issuing stable currencies.

Other options are also available. Kava has used a similar system to create stable cryptocurrency-backed currencies pegged to the US dollar so that users can offer liquidity with multiple assets like Bitcoin and XRP to issue fixed currencies pegged to the US dollar. John Woo, president of Ava Labs, a team that supports landslide development, told Cointelegraph:

“Decentralized stacking coins have played an important role in the growth of Defi. Without MakerDAO’s innovation in creating fake US dollars backed by cryptocurrencies, the ecosystem would not be as mature as it is today. ”
While this is a new concept, it can also be dangerous for those providing liquidity to the system. Given that Dai is backed by Ether, members must provide a high degree of security, which also risk being completely liquidated in the event of a significant drop in the price of Ether.

Talking about launching new concepts such as a hybrid stablecoin, Wu mentioned the recently released FRAX fixed coin, which combines sourcing and algorithmic side controls, and added: Ethereum blockchain high congestion. ”

Underlying assets problem
Decentralized stack coins are an alternative to simple stack coins like USDT, but the volatility of cryptocurrencies also makes them dangerous for liquidity providers, holders and users. Many companies are now trying to find a solution that allows decentralized and stable coins to “meet in the middle.”

For example, Five5Five has created and will soon launch a new stablecoin model in which a stable currency can be pegged to the US dollar while eliminating the risk associated with volatile foreign exchange reserves. The United States Reserve Dollar (USDR) is a gold-backed cryptocurrency that can maintain a dollar / dollar ratio.

Source: CoinTelegraph

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