Stablecoins Simple transactions or high risk?

If you are interested in investing in cryptocurrencies like Bitcoin or Ethereum, sooner or later you will also come across the topic of stablecoins. Just like Bitcoin and Ethereum, stablecoins are cryptocurrencies – and yet there are serious differences. You can use all of them to pay at the 22Bet for your next bet. 

What is a stablecoin?

Stablecoins are a special type of cryptocurrency that is primarily about value stability. The name alone reveals that. This stability should be ensured by another asset to which the stablecoin is pegged as a reference value. Usually these are the US dollar or the euro. Such government currencies are also called fiat currencies or fiat money. But there are also coins with the price of gold as a reference value. 

So a stablecoin, for example, is always worth one US dollar. The US dollar also changes its value over time, but not nearly as much as cryptocurrencies like Bitcoin, Ether, and others.

The goal is to keep the value of the stablecoin constant so that it is also suitable for everyday transactions. Bitcoin, Ether and other cryptocurrencies, on the other hand, fluctuate greatly in value.

How do stablecoins work?

To ensure their stability, stablecoins use three different mechanisms: physical reserves, crypto reserves, and algorithms.

Type 1: Stablecoins with physical reserves

If the issuers always have one US dollar in reserve for each stablecoin issued, it is a fiat-collateralzied stablecoin. They are also called fiat-collateralized or fiat-collateral stablecoins. The word “fiat” refers to state currencies. This suggests that these are real foreign exchange reserves in, for example, US dollars and not cryptocurrencies. 

The companies that issue the respective stablecoin invest this reserve partly in government bonds, money market funds and other assets. Well-known fiat-collateralized stablecoins are Tether (USDT) and USD Coin (USDC).

If you want to buy USDT, for example, you pay $50 to Tether Limited, the company behind the stablecoin Tether. In return, you receive 50 units of USDT. If you return the USDT, it will be destroyed, i.e., removed from circulation. You’ll get $50 back then. In practice, however, you will usually buy and sell stablecoins through crypto exchanges. 

Type 2: Stablecoins with crypto backing

Stablecoins can also map the US dollar without holding US dollars as a reserve. The coverage is then provided by a cryptocurrency. The stablecoin DAI, for example, is partially backed by Ether. If DAI coins are newly created, ether must be deposited. To hedge the fluctuations of Ether, investors must deposit a disproportionate amount of Ether. But even that cannot be enough if the cryptocurrency loses a lot of value. The administration is carried out via a smart contract, i.e. a protocol, not via a company. This mechanism is also known as crypto-collateralized. 

Type 3: Stablecoins with algorithms

Algorithmic stablecoins typically have no reserves, but use algorithms that control supply and demand by destroying or issuing coins so that the price remains stable. However, the well-known stablecoin Terra (LUNA, UST) experienced a crisis of confidence in 2022, causing its price to plummet. The price no longer settled – so the stablecoin had lost its peg to the US dollar. He collapsed.

What is the goal of stablecoins?

Stablecoins are intended to be a bridge between cryptocurrencies and the classic financial world, where payments are made with US dollars or euros. Good stablecoins reliably represent the value to which they are pegged, so there should be as little variation as possible.

Stablecoins are an important element within the crypto world because their stability in value makes trading, transactions and the storage of value easier. They are frequently used 

• for fast and cheap transactions worldwide.
• for trading and exchanging cryptocurrencies on crypto exchanges. Because a stablecoin saves conversion into government currencies such as dollars or euros, which saves time and fees.
• to hedge price fluctuations in the crypto market.
• as a means of payment for goods or services.