Crypto-Backed Stablecoins: Definition, Impact, and Market Role

Salomon Kisters

Aug 15, 2022

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You may be asking what crypto-backed stablecoins are, how they work, and what their market impact will be. Here’s the short answer:

Cryptocurrency needs stablecoins. Unbacked cryptocurrencies can’t be used as money. Stablecoins offer a consistent value for trading other cryptocurrencies. Stablecoins support NFT-based payment systems, crypto-backed debit cards, and Axie Infinity.

This article will explore crypto-backed stablecoins and their underlying assets. Stablecoins can assist you in navigating the crypto ecosystem.

Crypto-backed Stablecoins

Cryptocurrencies and other digital assets have been around for a few years now, but they have not found widespread adoption in mainstream commerce.

As a result, their value is often determined by untamed speculation. In fact, some crypto investors have become millionaires overnight, only to lose their money several weeks later. Because of this unpredictability, stablecoins are needed to help stabilize the value of cryptocurrencies.

There are two main types of stablecoins.

The first is the traditional stablecoin, which is tied to a specific crypto asset.

In contrast, the second type of stablecoins is algorithmic. Algorithmic stablecoins do not require any collateral or asset backing, and their prices fluctuate based on market demand and supply.

However, algorithmic stablecoins have not yet made a big splash in the mainstream market, so they are not as widely used.

Characteristics of Crypto-backed Stablecoins

Currently, a number of financial services incumbents are examining the opportunities created by the emergence of crypto-backed stablecoins.

Despite the vast potential of stablecoins for financial stability, a recent survey of central banks showed that two-thirds are actively studying the possibility of such products.

As the popularity of stablecoins has continued to rise in recent years, the underlying concept of stablecoins is still deemed controversial.

While many regulatory bodies think that they pose a serious risk to the traditional financial system, some cryptocurrencies have received regulatory blowback from regulators.

Stablecoin’s Underlying Assets

While cryptocurrency prices can fluctuate rapidly, the use of stablecoins makes them as stable as the underlying assets. Stablecoins are backed by the value of a fiat currency, usually the US dollar, or a combination of cryptocurrencies.

The idea behind these coins is to give the cryptocurrency community all the benefits of a digital currency without the risk of extreme volatility. These stablecoins can also make cryptocurrencies a viable payment option for many businesses, as most do not want to deal with volatile currencies.

Unlike their fiat counterparts, crypto-backed stablecoins are more decentralized and run on blockchain tech. Because they are backed by other cryptocurrencies, they often over-collateralize to absorb price fluctuations.

In this way, if the price drops below the desired level, the coin will automatically liquidate itself.

The Potential Impact of Stablecoins

One of the most common questions on the potential impact of crypto-backed stablecoins is whether they will trigger regulatory scrutiny.

While the FSOC (Financial Stability Oversight Council) has not yet designated any entities as systemically important financial market utilities, it is possible that they may in the future, particularly if the adoption of stablecoins becomes widespread.

The regulators may also wish to ensure compliance with laws governing the “know your customer” and anti-money laundering practices.

While the market regulators in the US are not currently involved in stablecoin regulation, they intend to play a leading role in the development and implementation of this new technology.

DAI Stablecoins

Dai is a stablecoin that offers stability, decentralization, and transparency to blockchain technology. This is because it is built on the Ethereum network. As such, its price can maintain a consistent $1 value despite drastic economic changes. For those interested in investing in it, Dai is an excellent option.

The Maker DApp uses Ethereum’s blockchain to back Dai. This way, users can leverage Dai as collateral for CDPs. This means that if you deposit $100 Ether, you will be able to borrow 66 Dai. Since the Dai price is constantly rising, this is an excellent investment opportunity.

The Dai system employs a unique method of economic incentive-balancing that keeps the price from falling. When the Dai price falls below $1, keepers will buy it. As the price increases, keepers will sell it. As a result, the market will have less supply of Dai and push its price back up. The industry continues to grow and diversify, so Dai is a solid choice for DeFi investors.

Neutrino USD (USDN)

Neutrino USD is a stablecoin backed by the WAVES protocol, a decentralized network of all-encompassing cryptocurrencies. Using the WAVES protocol, you can create tokens with real-world assets. The WAVES protocol was developed by Sasha Ivanov, a Russian Tech Entrepreneur and CEO of the Vostok Project.

The toolkit that comes with Neutrino USD makes the process of creating a stablecoin fast and easy. It supports fiat currencies, commodities, and various other real-world assets. Neutrino USD is also supported by the DeFo project, which provides a banking service for regions where banking is not efficient. It allows users to swap stable-priced assets with fiat currencies in seconds.

The WAVES protocol rewards the exchange of WAVES with USDN. WAVES tokens are the assets that Neutrino USD is backed by. Moreover, WAVES tokens are held by contracts and provide incentives to users. They are backed by the WAVES platform and can be used as a means of payments and transfers. It also allows for automatic swaps to facilitate easy transactions.

sUSD

Coinbase and Circle introduced USDC in 2018 as a stablecoin. The USDC token is a $1-backed stablecoin with a 1:1 backing. These companies have joined forces to ensure the security and transparency of the currency.

Although sUSD stablecoins are not the first choice of crypto purists, they are an easy entry point for new investors without the risk of incurring huge losses. Investing in sUSD stablecoins offers traders and investors a number of advantages. These coins have a stable value, which makes them a convenient way to protect their investments and earn a passive income.

Despite the volatility of cryptocurrencies, sUSD stablecoins’ value holds up well over the long term. They fluctuate only by a few percent over and below $1. However, sUSD stablecoins have not yet seen widespread adoption outside of crypto exchanges.

The sUSD stablecoin can be held in a crypto wallet or traded on an exchange. This increases liquidity and removes the friction that often occurs with cryptocurrency transactions. Besides, stablecoins are backed by fiat currency, so they can be traded as easily as any crypto-to-crypto trade. sUSD coins are great for those who are concerned about volatility and want to protect their investments.

EOSDT

EOSDT is the first decentralized stablecoin on the EOS blockchain built on an Equilibrium smart contract platform. This allows users to generate their own stablecoins, pegged to the USD, and then exchange them for fiat or digital assets.

Its value is secured by the EOS-backed stability fund. The EOSDT stablecoin has been generating 4.4 million coins since its launch. Users are gaining 0.55% profit per unit of collateral.

EOSDT is popular with traders who want to protect their investments against market volatility. With its price-stable liquidity, EOSDT can be bought with as little as 1% APR. Users lock up their EOS holdings in Equilibrium’s smart contract, which has a user-friendly self-service gateway. Furthermore, EOSDT will support other cryptocurrencies in the future.

The governance of EOSDT also has a role to play. EOSDT will monitor the market and make changes when needed. It will also liquidate undercollateralized positions, incurring a 15% liquidation fee. Then, position holders can either add more collateral or pay back some of the EOSDT in which they held them.

This mechanism is intended to mimic central banks’ interest rate controls. Hence, it is a good alternative to fiat, but the decentralization and adoption of EOSDT will be highly dependent on the success of the platform.

Defi Dollar (DUSD)

The Defi Dollar stablecoin (DUSD) is an ambitious project that is in its early stages of development. Its primary goal is to develop a range of products for the DeFi protocol, making it easy and safe to use.

The DUSD platform is built on the blockchain and backed by Curve Finance LP tokens, a decentralized exchange liquidity protocol that was designed specifically for the trading of stablecoins. The DUSD platform is built with modularity in mind, making it easy to implement smart contracts and integrate DUSD into existing systems.

Defi’s de facto stablecoin, Dai, often varies from the peg, causing a significant price fluctuation. This instability has led many developers to strive to create a “perfect” stablecoin. In addition to being stable, the perfect stablecoin would be trustless, have manageable collateralization ratios, be based on Ethereum, and support BSC (Binance Smart Chain). Defi has been able to fulfill all these criteria and more.

Defi Dollar stablecoin is a decentralized currency that maintains parity with fiat currencies. To create a Defi Dollar, a partnership between two blockchains is required. This is a requirement for algorithmic stablecoins to function. Defi is a good example of this model. As a platform for lending, Defi utilizes the MakerDAO blockchain to allow its community to leverage BTC and EOS to backstop the Dai dollar peg. It also enables the use of EOSDT across the DeFi ecosystem.

Conclusion

Crypto-backed stablecoins are digital currencies that are pegged to the US dollar at 1:1. They have the benefit of using the cryptocurrency’s potential for increased trust and stability. But these coins are still not without risk.

Crypto-backed stablecoins have the potential to help popularize cryptocurrency as a financial vehicle for everyday financial transactions. These digital currencies are an attractive alternative to fiat currency, incorporating the benefits of both. These benefits make it easier to see how stablecoins could help the crypto industry gro

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