Did you know?, Stablecoins have been around for quite a while now, since the year 2014. Stablecoins are essentially, a form of cryptocurrency that is dollar-denominated. There are a number of benefits that this cryptocurrency provides which includes the traditional benefits such as fewer hurdles in terms of regulations, and fast settlement along with the stability of the dollar. As a result of this, arbitraging is easier between exchanges.
Essentially, one stablecoin will be worth $1. While Tether’s may be traded for cost as less as $0.85 but that is not a norm, rather it is an exception.
So how do Stablecoins actually work?
Well, there are two types of stablecoins. The first time is the algorithmic stablecoin, while the other type is the fully backed stablecoin. Both of these types differ in terms of the centralization. For instance, the Stablecoins that are fully backed are backed by the money in the bank and it is fully reserved. For instance, for every $1, there will exit one stablecoin equivalent to it. The algorithmic stablecoins, on the other hand, follow a mechanism of the market, according to which it is possible for the crypto cost to get changed in order to follow the rise and fall of the dollar.
So are stable coins really stable?
If we talk about Tether, it has been quite stable for a while. The prime reason why Tether may be traded at parity mostly is that there is a high possibility that in some bank, the Tether is backed by the dollar. As far as the stability of a fully backed stablecoin goes, there are a number of factors that might play a role here.
For instance, in case a bank account gets seized, the Tethers will drop in the value significantly. This is because the cryptocurrency will not be backed by the dollar anymore.
Are there any risks associated?
Yes, there are a number of risks that are associated with Stablecoins. For instance, in case a Stablecoin is partially or fully backed by the dollar, the bank account can be at the risk of getting seized. Now a bank account can get seized due to a number of factors that include socialization, KYC laws, AML laws, and different government laws.
Apart from that, there are a number of risks that are associated with centralization. For instance, banks may simply cause a legal battle by closing the account. Apart from that, there always exists the risk of an algorithmic manipulation. For instance, bonds that are bought in basis may simply expire.
In the end, it is not entirely possible to have a stablecoin that is free from any sort of risks. This is because of the fact that central bankers seek the following three things:
- Due to the flow of a free capital
- Pegging to a different currency
- Independent monetary policies
Nevertheless, the Stablecoins can be useful for a person in case the person is able to redeem them pretty quickly and has a good level of trust with the issuer. Do remember that a fully backed coin does always have the risk of centralization.