Stablecoins are maybe the most famous category of cryptocurrencies whose value is pegged / tied to another currency, commodity, or financial instrument to maintain price stability. Stablecoins was created with the clear aim to ‘fight’ volatility in the markets so people can use it to diversify their portfolios. This made crypto investments more suitable and less risky for most of the people. You can trade any cryptocurrency and then convert to any stablecoin to enjoy small profits.
Stablecoins are a great medium of exchange in the current market and more useful than most of the coins out in the market. Most of the cryptocurrencies in the market tend to suffer from high volatility in their prices in contrast to stablecoins which maintain a price stability.
There are three main categories of stablecoins in the market:
Fiat-Collateralized Stablecoins:
Fiat-collateralized stablecoins maintain a stable price by pegged to a fiat currency such as the USD or EURO.
Crypto-Collateralized Stablecoins:
Crypto-collateralized stablecoins are backed by any other cryptocurrencies. Due to the fact that the reserve cryptocurrency may also have high volatility, such stablecoins are overcollateralized.
Algorithmic Stablecoins:
The primary difference between the other categories is the strategy of keeping the stablecoins value stable. This is done by controlling its supply through algorithms, essentially computer programs running formulas.
Top stablecoins my market capitalization as of today.
Not all stablecoins are stable.
How do I know this?
Because I have experienced the great tragedy of TerraUSD (UST) crash. On 11 May 2022 the coin was traded at 0.30 cents. Normally the coin had maintained the price of 1.00 USD. TerraUSD (UST) related to Luna crypto. The crash was caused by its connection, the algorithmic stablecoin of the Terra network. During some days before the depegged, over $2 billion worth of UST was unstaked (taken out of the Anchor Protocol which was the biggest one back then of the ecosystem), and hundreds of millions of it were quickly liquidated.
That’s why regulators are looking more and more on crypto regulation especially on stablecoins. Many people have lost their money from this occasion probably forever and cannot go to any entity for their protection. Their money is gone forever.
As part of the crypto ecosystem, we need stablecoins to get transactions safer and fight volatility through their ability to maintain stable value. My opinion is that If regulators have good intentions for the industry and they will not make a framework that would prevent people from using stablecoins, but rather to scale it, then they are more than welcome to join and create a proper regulatory supervision framework.
