What is a stablecoin and how does it relate to a legal digital currency?

What is a stablecoin? Is it the same thing as the legal digital currency and electronic money issued by central banks? Today, let’s talk about stablecoins.

Perhaps you have seen the news in the media that central banks are studying legal digital currencies, or perhaps you have heard the term “stablecoin” a lot.

So, what is a stablecoin? Is it the same thing as the legal digital currency or electronic money issued by the central bank? Today, let’s talk about stable coins.

01
What is a stablecoin?

What is a stablecoin and how does it relate to a legal digital currency?

A stable coin, as the name suggests, is a cryptocurrency that maintains a stable exchange ratio with a certain underlying.

In blockchain circles, the most popular stablecoin you hear about is USDT (Tether). Let’s take USDT as an example, it is the token Tether USD (hereinafter referred to as USDT) launched by Tether, which is anchored to the US dollar. 1 USDT = 1 US dollar, and users can use USDT to exchange 1:1 with the US dollar at any time.

In addition to USDT, there are also TUSD, GUSD, BitUSD and other stable coins anchored to the US dollar. Of course, there are also stablecoins that are anchored to other currencies, such as BitCNY, which is anchored 1:1 to RMB.

You may ask, does the money transferred by WeChat or Alipay count as stablecoin? After all, they are also anchored 1:1 with RMB.

In fact, the money in cell phones and Alipay can only be called electronic money, not stable coins. If the central bank issues a legal digital currency in the future and anchors it with the current RMB, this legal digital currency can be called a stable currency.

In other words, stablecoin is not only the electronicization of money, it is also a programmable cryptocurrency, a category of currency only after the birth of blockchain technology.

02
How does a stablecoin remain “stable”?

The exchange rates of currencies around the world are always fluctuating, so how do stable coins maintain a “stable exchange ratio”?

For the USDT mentioned above, Tether has committed to a strict 1:1 reserve guarantee, which means that for every USDT token issued, its bank account is guaranteed with $1, and users can check their funds on the Tether platform to ensure transparency. This is “stability” maintained by “legal tender collateral”.

The second type of stable coin relies on “digital asset collateral”. A typical example is BitCNY, where you can pledge your BTS coins to the system, and the system will give you BitCNY. Since the price of digital assets fluctuates, if the price of BTS drops significantly and the total value of the BTS coins you pledged to the system drops close to the total value of BitCNY the system lent you, and you do not increase the amount of BTS coins pledged, the system will force you to sell your pledged BTS coins. This is similar to a bank mortgage, where the value of the house you pledged to the bank drops and you can’t afford to increase the collateral, the bank takes the house away and sells it to fill the loan.

The third type of stable coin, relies on algorithms to ensure stability. A typical example is Basis, which, like the Federal Reserve, stabilizes the 1:1 exchange ratio with the U.S. dollar by adjusting the supply of Basis. However, the Basis project is currently out of operation.

03
The role and flaws of stablecoins

You may wonder why WeChat and Alipay create stablecoins when they are so convenient.

It is true that in daily life, stablecoins do not have many uses and transferring money is not as convenient as WeChat or Alipay.

But in the field of cryptocurrency, stablecoins have many uses and are a bridge between the real world and the crypto world. The price of cryptocurrency fluctuates a lot, and stablecoin acts as a value scale and a hedge in the process of market decline.

Of course, the current stable coins are not perfect.

The “fiat currency collateralized” stablecoins, such as the USDT mentioned above, are issued by Tether, and the company’s lack of financial transparency has often led to questions about its self-initiated USDT issuance for profit.

“When the price of BTS coins fluctuates greatly, many investors will be forced to sell their BTS coins below the market price when the price drops sharply and they become insolvent, causing the price to fall further and a series of collapse events.

The stable coin, which relies on “algorithms to maintain stability”, has been criticized even more.

04
Conclusion

At present, many countries in the world have started to research national digital currencies, and Venezuela has even launched its own national digital currency, the petrodollar. In terms of digital currency research, China’s central bank is at the forefront of the world.

A national digital currency, also known as a legal digital currency, is a stable coin.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-is-a-stablecoin-and-how-does-it-relate-to-a-legal-digital-currency/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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