Traditional crypto assets like Bitcoin & Ethereum have seen a lot of price fluctuations in a short period of time.
To minimize the adverse effects of such volatility during bear markets, crypto investors have started diversifying in stablecoins like USDT (Tether) and USDC (USD Coin) in their portfolios.
Moreover, the size of the stablecoin development market is now currently close to $3 billion, which is 2.7% of the total market value of all crypto assets. Undoubtedly, stablecoins are something that’s comparatively safe and secure to invest in the crypto world as beginners.
But what actually are stablecoins and their different types? What is the need and different use cases of stablecoins?
Let’s discuss everything one-by-one!
What is a Stable Coin?
A stable coin is a cryptocurrency whose value is rooted in either another currency, the US dollar, or assets. It is a form of e-money to have designs on real-world time currencies. Stablecoin does not change unforeseeably or briskly. Some of the stablecoins serve the behavior of a 1:1 ratio which means they are equal to any US dollar, gold, or precious metal.
The first stablecoin was issued in the year 2014. Since then, they are preferred by everyone as they confound with the problem of volatility that we have witnessed in other cryptocurrencies.
Initially, they were used to buying cryptocurrencies on trading platforms and they do not propose fiat currency trading. Fiat currency refers to a government-issued currency that is not backed by the commodities or assets like gold, or silver. But with the development of time, stablecoins have now started offering multiple advantages.
For instance, now they are used to pay for goods and services and are also used in several blockchain-based financial services.
The Need for Stablecoins
Today, stablecoins are more in favor compared to other cryptocurrencies like bitcoin because of their steady nature. Its value does not change vigorously thus eliminating the fear of investing your money directly in cryptocurrency.
Stablecoins are the alternative that retains the fixed value of your fiat currency.
Moreover, if you are tired of using multiple international bank accounts to send crypto to your friends in other countries then your problem is resolved now because stablecoins users need only one crypto wallet to send crypto to their friends.
Plus, they do not require any third-party intermediaries to promote transactions because they make true peer-to-peer digital transfers viable. They are bargaining chips as cryptocurrencies that serve the same behavior like transparency, immutability, security, and fast transactions, but without dropping the assurance and maintaining high volatility.
Key Benefits of Stablecoins
Let’s talk about the 4 major reasons or benefits of building and using stablecoins:
Simplify Things for Cryptocurrency Exchanges
With stablecoins, cryptocurrency exchanges get to keep aside the complex financial regulations involved with institutions that deal with fiat currencies. This gives users the convenience of having a stablecoin trading pair and also keeps everything within the cryptocurrency ecosystem.
Play a Vital Role in Decentralized Finances (Defi)
Stablecoins have become an important component of the decentralized finance (Defi) space. Investors can make transactions like peer-to-peer lending — where people make direct loans to each other via blockchain — with stablecoins.
Some users may go for options to other cryptocurrencies, which could adversely affect their rate of return if the price goes down. A stablecoin adds an element of predictability to financial arrangements.
Stablecoins Make Trading Easier
Crypto traders often make use of stablecoins to get the maximum advantage.
When moving money between multiple volatile cryptocurrencies, earning profits can be difficult.
Stablecoins prove to be an easy solution to this problem. Traders can simply choose a stablecoin like USD Coin (USDC) or Tether (USDT) to immediately lock in gains. Or, they can leverage the arbitrage opportunities when the same cryptocurrency has a different price on two different exchanges.
Also, crypto exchanges have begun offering more stablecoin/altcoin pairs for traders.
Allow Rapid & Cost-Efficient Cross-border Payments
Traditional bank transfers usually take around three-to-five business days and can cost anywhere between a few dollars to dozens of dollars. International transfers tend to be the most expensive.
Stablecoin transactions are confirmed & completed within minutes, or even less, and that too at a very little cost. Two people with stablecoin wallets can transact with each other from anywhere in the world without the need for a bank or other third-party intermediary.
Types of Stablecoins: Collateralized & Non-Collateralized
Let’s quickly have a glance at the two major types of stablecoins i.e collateralized and non-collateralized and their further sub-types.
Collateralized stable coins are coins whose value is financed by precise collateral such as assets, cryptocurrencies, gold, US dollar, or fiat currency. Further, their sub-categories are:
1. Fiat-backed stablecoins
Fiat-backed stablecoins are bind to the value of the fiat currency. Tether (USDT) was the first fiat-backed stablecoin that carried the idea of fixing the cryptocurrency value to the US Dollar. Stablecoins backed by fiat currencies hold their funds in fiat currencies like the U.S. dollar. They always have one dollar in reserve whether it is in cash or something whose value is equal to cash for every token in circulation.
2. Asset-backed stablecoins
Assets-backed stablecoins are not bound to cryptocurrency or fiat currency. They deal with assets such as real estate, diamonds, gold, or silver. To neutralize the volatility they use a “Security pledge” which is not available in fiat-backed stablecoins apart from that they work the same. The value of smart contracts is based on the volatility in the ETH price.
3. Crypto-backed stablecoins
As the term implies crypto-backed stablecoins are ones bound with cryptocurrencies(usually ETH) instead of fiat currency or assets. They use smart contracts to confirm assets as collateral.
Non-collateralized stablecoins are not bind to any reserved asset. They are quite similar to algorithmically stablecoins. However, they do not hold any reserve in smart contracts. Rather, their stability is emanated from a working mechanism like a central bank.
Algorithmic stablecoins may contain reserve assets. In this, they run a preset formula handled by the computer and their main focus is mainly on maintaining the price stable by retaining its supply via algorithm.
Stablecoin Development Process: How to build a Stablecoin?
Just follow these simple steps to create a stablecoin.
1. Specify the kind of stablecoin you would like to prefer for the deployment. This might be a little confusing for you which coin should you choose and why? but don’t worry just get answers to these below-mentioned questions.
- How much liquidity do I require from my stablecoins?
- What kind of decentralization/independence should I prefer?
- If audits occur how much reduction/stakes can I afford?
- Do I want my entire structure to be uncomplicated or intricate?
2. Finalize the blockchain platform and technology to create a stablecoin preferably using Ethereum, you can also go with any of your preferable platforms. The majority of the coins were running on Ethereum before 2018. But in 2019, the market witnessed a tremendous shift where people favored using stablecoins because of the benefits they offer :
- Ampler interoperability
- Heightened scalability and trading bandwidth
3. Moving to the next step, you have to think about how you are going to maintain your liquidity. We would like to mention that if liquidity fails, the time you invest in the formation of stablecoins might be unproductive. Follow these below steps to make assure good liquidity and make your time and project to be efficient and productive.
- Estimate the general rise in price and value to propose customary currency rates.
- Your transaction fees should be divided in such a way that some will go to the stablecoins partner and others for the improvement of liquidity.
- Safeness from increased supply. If users vend or redeem their stablecoins they must be capable to do so at existing face worth minus transaction fees to prevent them from selling in secondary markets at discounted rates.
4. Creating a smart contract is another important step in stablecoin development. Smart contract facilitates immutability, decentralization, and transparency. With the help of virtual wallets on test networks, developers can create, test, and launch smart contracts. (For e.g In case you are using Solidity you can create a smart contract using the Ethereum network).
5. Now, create a pictorial design for your stable coins and how the pals interact with your coin. Designing stablecoins explains getting a vision of the flow of transactions and the entire system will work. How it will look on mobile/web apps. Technical designs are also provided by our stablecoins experts which signifies the whole workflow of stablecoins.
6. In the next stage, you can direct the smart contract to interact with stablecoin and launch nodes on the platform that you use. After developing the features and communing with the blockchain backend, the final step is to launch it on the testnet.
Hope that this blog was able to clear all your doubts and queries related to stablecoins – what they are and how to build one.
Being a leading blockchain development company, we also highly specialize in all types of crypto coin development services. Thus, if you want to build your own stablecoin, feel free to get in touch with us!