When it comes to housing, you have to choose between renting and buying. These are the kinds of decisions that raise the age-old dilemma of whether long-term or short-term investments are more appropriate. It's vital to understand when and how to employ which kind in these situations. It's the same with our money in today's decentralized society - Bitcoin or Stablecoin? Do you want to take a chance on a new cryptocurrency bull market or remain with what you know?
There are compelling reasons to choose fiat currency to volatile cryptocurrencies, such as the worth of a dollar. But how stable are "stablecoins," decentralized currencies backed by more stable assets such as fiat currency, diamonds, or gold?
Although several types of stablecoins are stable, there is a trade-off between the degree of innovation in their stability mechanism and the level of actual value stability. It's critical to find the right balance.
The least creative stablecoin types are Positive and Negative Fiat-collateralized stablecoins, which are 1:1 tied to fiat currencies. They also rely on existing infrastructure to keep the money safe, like as banks, whereas blockchain is only used to create the token that symbolizes the currency. This means that every fiat-collateralized stablecoin in a bank account is backed by a fiat currency. As a result, the value of basic tokenized fiat may remain stable as long as the underlying currency remains stable.
Another type of stablecoin known as "crypto collateralized" coins may appear to be more enticing, but do they serve a better purpose? These tokens are tied to other cryptocurrencies as collateral. Because crypto values are volatile, a number of steps must be followed to ensure that the stablecoin's price remains constant at $1. Due to a wide pool of crypto reserves, the tokens, on the other hand, can survive market shocks. An example of such a strategy is over-collateralization. A 1:2 value ratio might be utilized to peg a crypto-backed stablecoin in this situation. This means that a cryptocurrency reserve of twice the stablecoin's value is kept for each stablecoin to help "cushion the blow" of market swings.
This method has a lot of potential, but what are its drawbacks? The DAI stablecoin from MakerDAO is an example of a token that uses this method. It's debatable if DAI's stability mechanism would be able to support the token if the value of any of their crypto holdings, such as Ether, plummeted. Scalability is another property of DAI that has been questioned. Each coin would need a substantial quantity of cryptocurrency to act as collateral, making minting new coins prohibitively expensive.
The most innovative sort of stablecoin is non-collateralized stablecoins, often known as "algorithmic stablecoins." These tokens are not backed by any collateral cash and instead rely on manipulations of the overall quantity to maintain a peg. Following the creation of a coin and the setting of a peg, the price of the token on the exchange can be algorithmically monitored using open source code that everyone can inspect and audit. Users' expectations of the future value of what they're holding, rather than cash, support algorithmic stablecoins. Because the activities of these coins are completely decentralized, they are only used by people who have a strong need for privacy and distrust of established financial institutions. Furthermore, algorithmic stablecoins have yet to properly proven their ability to withstand crypto market shocks, despite their cleverness.
Is There Any Hope?
At some point, someone will have to unravel all of the strands. The goal is to create a stablecoin that can bridge the gap between innovation and fiat-backed security. EURstablecoin, or EURST, is a fiat-backed stablecoin initiative aimed "to parallel the concept of cash and cryptocurrencies," according to Simone Mazzuca.
EURST is a forward-thinking currency, despite its fiat basis. The fiat collateral will exist as $USD in a real-time audited and transparent reserve managed by Wallex Trust's trusted third-party custodian, whereas the tokens will exist as cryptocurrency produced on the Ethereum network and according to the ERC-20 token standard. While EURST is the token issuer, Wallex Confidence holds the assets in an escrow account with an independent third-party custodian, providing an additional layer of protection and trust for both crypto and traditional consumers. EURST is based on a transparent foundation: frequent third-party audits will be performed, and token transactions will be recorded on-chain.
“Having a physical, real-time audited, and redeemable USD reserve effectively pegs the market value of EURST tokens to the real-time USD value of 1EUR.” - EURST Whitepaper
Trust, among other things, is an important aspect of what gives money its value, and the rise of Bitcoin has only served to emphasize this. In the middle of the continuous innovation vs. stability trade-off among stablecoins, what might a solution look like? Indeed, a stablecoin like EURST, which integrates useful components from all of its peers, looks to be necessary to establish the appropriate balance in order to address a multitude of issues related to cryptocurrency volatility.