17 C
Los Angeles
Monday, March 27, 2023
HomeCryptoAre Stablecoins Truly Stable?....

Are Stablecoins Truly Stable?. Cryptocurrencies can be tagged as the… | by Dare Adegoriolu | Coinmonks | Aug, 2022

Cryptocurrencies can be tagged as the wild wild west where you have to hope for the best in terms of gains while simultaneously prepping yourself for the unforeseen. Within a matter of minutes or a few hours, things can shift from the utterly favourable to negligibly ugly, leaving investors (token holders) with an eternal combination of a bitter-sweet taste.

Enough of the twisted words and literary exposition.

Amid the chaos of cryptocurrency, stablecoins were created to offer respite and a haven to users. More like an avenue to erase speculations and hold digital assets in a stable mode, close to physical cash. They are meant to be digital equivalents of regular currencies such as the Euros, US dollar, and Pounds. This way, crypto users who hold equivalent can easily trade their assets for cash in the bank.

This arrangement seems good until it does not. So, what then happens when your stablecoins become unstable?

Agreed that stablecoins are meant to be resistant to crypto market sentiments, but the foundation of these classes of digital assets is what largely determines how resistant they will be in the face of market turbulence.

In clear terms, all stablecoins are not built in the same way, therefore, they are backed by different asset classes. Most are backed directly by cash equivalent in cash reserves (traditional banks), while others are backed by other forms of cash equivalent such as treasury bills, gold, and the likes. Other stablecoins, however, are algorithm-pegged, meaning that their stability hinges on the value and stability of other digital assets (cryptocurrencies).

As an instance, stablecoins such as USDT, USDC, and BUSD, maintain their equivalence to the dollar by maintaining cash reserves, while DAI and the defunct TerraUSD are algorithmic stablecoins.

Well, the answer is both “Yes” and “No”. Otherwise, we can say that they are relatively stable. So, here is it — it is quite common that stablecoins veer off their direct currency peg from time to time but the underlying rule is that they come as close to their peg as possible. Stablecoins with cash reserves have mostly stayed within 0–0.02% of their pegs over the years. This has helped them gain the status of relative stability.

For a coin like BUSD, it maintains the exact equivalence of its digital value in cash deposit reserves, and its state is published at the end of every month. For USDT, it maintains a much more diverse portfolio of assets as a backup. It holds its cash reserves in the form of treasury bills, gold, bonds, and other forms of stable assets.

On this ground, stablecoins that maintain cash reserves (or equivalent) can stand the test of time and are much more durable since there is the money equivalent to the digital asset.

Contrary to how stablecoins with cash reserves work, algorithmic stablecoins do not have any form of cash reserve as a backup. They rely on a system where their value of maintained by being directly pegged to the value of another digital asset, usually another token.

To maintain their stability, algorithmic stablecoins burn and mint tokens when necessary. When the price of the pegged asset goes up, the number of algorithmic tokens is burned to preserve the price, while more tokens are minted when the price of pegged token goes down. Therefore, constant minting and burning are ongoing, controlled by the on-chain forces of demand and supply.

This arrangement makes perfect sense but leaving everything to an algorithm is a lot of risks as became evident in the crash of the Terra USD algorithmic stablecoin. The crash was precipitated by the inability of the pegged algorithm to maintain the burn-mint mechanism with more tokens required to be minted as a result of the bear market crash that had impacted LUNA. Within hours Terra crashed to a quarter of a dollar and went on a spiral that it never recovered to date.

Stablecoins are elements of stability on the blockchain. Intrinsically, they hold the key and serve as the gateway between the real world and the blockchain. However, their approach to maintaining on-chain stability goes a long way in determining how stable they can be. For now, it is safe to tend towards stablecoins with cash reserve as they have a reserve that effectively helps them maintain stability.

Join Coinmonks Telegram Channel and Youtube Channel learn about crypto trading and investing

Source link

Most Popular


Please enter your comment!
Please enter your name here

More from Author

Ari Lennox Shares ‘Princess And The Frog’ Video Audition

Ari Lennox revealed her fans were heartbroken late last year age gender location tourism Will be her last. "I love my loyal fans so much and can't wait to give you my all every night!!" she wrote on social media. "Europe, I love you, but...

DefiLlama resolves internal conflict, quelling ‘hostile takeover’ accusations

Decentralized finance (DeFi) analytics platform DefiLlam has resolved an internal conflict that threatened to result in a “fork” of the platform. The issue was first raised by developer 0xngmi, who claimed on Twitter on March 19 that DefiLlama was "subject to a hostile takeover" for launching a token...

Sifflet raises cash to expand its data observability platform

Organizations working with large amounts of data often struggle to ensure that data remains high quality. According to a research from Great Expectations, which creates open source data testing tools, 77% of companies have data quality problems and 91% believe that this affects their performance. With this...

Matt Kuhnemann gets ‘awesome tips’ from Ravindra Jadeja

Ravindra Jadeja he is a man of his word. India allrounder promised Australia spinner Matt Kuhnemann masterclass after the Border-Gavaskar series - and he did just that.Soon Fourth exam in Ahmedabad ended in a draw on Monday, Jadeja took time to speak to the Australian visitor....

At Ukraine’s front, police try to evacuate holdout families

AVDIIVKA, Ukraine -- Pale and grimy from living in a damp, dark basement for nearly a year, the crying teenager and her mother emerged to the sound of pounding artillery and made their way to a waiting armored police van that took them into salvationRussian forces were...

Rabbit Hole Cast Had No Idea About The Show’s Twists Until The Very End [Exclusive]

Meta Golding also came as a bit of a surprise to co-star as Hayley Winton in the series alongside Kiefer Sutherland. she told me: "When I first got the script, I think I had two episodes. At that point, I didn't even understand if she was good or...

Will Amazon Or Apple TV + Offer The Pac-12 Deal They Can’t Say No To?

By Jim Williams If we're to believe what we're reading in the trade press, the new Pac-12 media deal with ESPN, Amazon Prime Video, and Apple TV+ remains on the table. What we've been reading in the tea leaves is that potential conversations are heavy on distribution...

Abdur Rehman to be Pakistan’s head coach for Afghanistan T20Is; Umar Gul named bowling coach

Pakistan mentioned Abdur Rehman as a long-time principal and Umar Gul as the bowling coach for the three T20I matches against Afghanistan. Mohammad Yousuf and Abdul Majeed will continue as batting coach and player, respectively.Rehman is an experienced homework trainer with more than ten years of experience...

Ari Lennox Celebrates Sobriety With Splits In A Sexy Dress

go through Kay Lewis Posted on March 21, 2023 1:00 amAli Lennox released a series of Behind-the-scenes A picture was taken before she hit the stage, and they were kind of spooky. Ari Lennox Bling The singer wore what appeared to be gold coins, held together...

Arbitrum token finds its way to OTC market before the airdrop

The Arbitrum community has been speculating and selling its unissued ARB tokens in the over-the-counter (OTC) markets following Arbitrum's announcement. Arbitrum Foundation announced that ARB, Arbritrum's new token, will be released to eligible community members on Thursday, March 23rd. It was explained that ARB Marks Arbitrum's...