May 23, 2022 8:21 am

Crypto world: what they are and how to operate with stable currencies

1. Stable Coins. The world of cryptocurrencies or cryptoactives in general is taking a flight unimaginable a short time ago. The level of knowledge and investors grows along with an increasingly decentralized economy and, in particular, unstable economies like ours. Cryptocurrencies have a high degree of volatility. This responds to the well-known law of risk-return, according to which the great returns observed in recent years are associated with investments in cryptocurrencies that have not yet fully consolidated and that have more and more investors. An alternative to mitigate this volatility is what is known as stable coins.

2. Definition. Just as their name says, they are stable digital currencies. Why are they stable? Basically, because they are subject to more than just their own supply and demand. To put it more clearly, there are broadly two groups of stable coins: Those that are collateralized (that is, guaranteed) by some other particular asset, and those that are “uncollateralized” (not backed), not associated with any external value, that only use algorithms to avoid price fluctuations.

3. Warranties. Stablecoins can be collateralized by three different assets. The first is that of “fiat” currencies, that is, fiduciary currencies, such as the dollar, the euro or the yuan. In this group are Tether and USDCoin, backed by the US dollar and managed by companies that act as a central entity. To use it, customers can deposit dollars on the platform and receive in exchange the company’s tokens, USDT or USDC, which they can use like any other cryptocurrency. The second group is that of cryptocurrency-backed stablecoins; the best known is DAI and the main difference with Tether or USDCoin is that the issue is made with a “Smart Contract”, a digital agreement bound by rules defined by a group of holders of another cryptocurrency called Maker Dao (MKR). In other words, it does not depend on any centralized institution, but it does depend on a network of participants that acts in favor of the interests of users. The last group are currencies backed by other assets, such as gold or real estate, also guaranteed by the proper functioning of the blockchain.

4. DAI. We could assume that DAI is a “decentralized pawn shop”. Suppose I need money and all I have is a watch, but that watch has sentimental value and I don’t want to get rid of it; then, I can go to that house to leave the watch and ask for money. When I get the money plus interest, my watch will be returned to me. ICDs work like this. To generate them I have to give a cryptocurrency as collateral, usually ETH and USDC, to a pawn shop called Market Vault. To recover some or all of the collateral, the Vault owner must pay back or fully pay off the DAI they generated, plus a stability fee (interest). When I return the DAI to release my collateral, the Vault destroys it. Thus, the system is balanced and avoids being inflationary.

5. Future. The world of cryptocurrencies is complex and is constantly seeking to satisfy the needs of a new economy. Making transactions from one country to another without going through a traditional financial institution, saving in an asset that does not depend on discretionary decisions, or lending money, are actions that materialize through crypto assets; this time, from stablecoins.

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