{"id":283124,"date":"2021-06-24T21:10:00","date_gmt":"2021-06-24T18:10:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/how-stablecoins-stay-stable-explained\/"},"modified":"2021-06-24T21:10:00","modified_gmt":"2021-06-24T18:10:00","slug":"how-stablecoins-stay-stable-explained","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/how-stablecoins-stay-stable-explained\/","title":{"rendered":"#How stablecoins stay stable, explained"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a2ea1f9307a6\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a2ea1f9307a6\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/how-stablecoins-stay-stable-explained\/#What_is_a_fiat-backed_stablecoin\" >What is a fiat-backed stablecoin?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/how-stablecoins-stay-stable-explained\/#Are_stablecoins_controversial\" >Are stablecoins controversial?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/how-stablecoins-stay-stable-explained\/#What_is_a_stablecoin\" >What is a stablecoin?<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong>#How stablecoins stay stable, explained<\/strong>&#8221;<\/p>\n<p style=\"float:right;margin:0 0 10px 15px;width:240px\"><img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS9zdG9yYWdlL3VwbG9hZHMvdmlldy85YzFkOWM1YzdhMDU3OWVjNGQ0ZWJjODlhMmE2Yzg1ZC5qcGc=.jpg\" class=\"type:primaryImage\"><\/p>\n<pre><code>                Stablecoins use a variety of techniques to keep their value fixed, <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">general<\/a>ly to a specific fiat currency like the U.S. dollar.\n                &lt;h2&gt;Can a stablecoin make Ethereum scalable?&lt;\/h2&gt;&lt;p&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;&lt;em&gt;Crypto-backed stablecoin Free TON aspires to provide a layer-two solution for Ethereum\u2019s scalability problems.&lt;\/em&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;With overloaded Ethereum increasingly choked by slow transaction speeds and widely overinflated gas prices, the Free TON stablecoin will be a \u201ctrue layer-two solution with immense upside,\u201d TON Labs added. \u201cThe application of Free TON\u2019s second layer solution does much to remedy these problems. With the stablecoin, super cheap microtransactions can now be made and in a fraction of the time it would take on the original blockchain.\u201d&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;That in turn opens up a wide variety of new uses, ranging from making small payments viable, in fields like payment and gaming, it said.&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;Along with the new bridge between Free TON and Ethereum built by Broxius and the enormous scaling potential of Free TON\u2019s dynamic sharding, the forthcoming stablecoin\u2019s biggest hurdle, according to Free TON, \u201cwill be getting users to recognize the qualities of the platform and proving that it can handle the high workloads it was built for.\u201d&lt;\/p&gt;&lt;div style=\"background-color:#f0f0f0;color:#253137;font-weight:bold;padding:8px 21px\"&gt;Learn more about &lt;a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/freeton.org\/\" style=\"color: #253137\"&gt;Free TON&lt;\/a&gt;&lt;\/div&gt;&lt;div id=\"post-content\"&gt;&lt;p&gt;&lt;span style=\"color:#a9a9a9;font-size:12px\"&gt;Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice. &lt;\/span&gt;&lt;\/p&gt;&lt;\/div&gt;&lt;h2&gt;What is a crypto-backed stablecoin?&lt;\/h2&gt;&lt;p&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;&lt;em&gt;Crypto-backed stablecoins use what amounts to overcollateralized loans to keep their value correctly pegged.&lt;\/em&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;Crypto-collateralized stablecoins are backed by a basket of one or more other cryptocurrencies. As these are themselves highly volatile, these stablecoins are highly overcollateralized, and require purchasers to lock their collateral tokens into smart contracts that will be liquidated if the collateral drops in value too much. The collateral that can be collected by replacing the stablecoins.\u00a0&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;One of the best-known crypto-backed stablecoins is MakerDAO\u2019s DAI, pegged to $1. However, as MakerDAO learned during the March 12, 2020 \u201cblack swan\u201d event in which ETH\u2019s value was cut in half in less than 24 hours after it got overwhelmed by liquidations, making sure the system can handle extreme conditions is vital \u2014 forcing it to implement substantial governance and auction management changes. That was successful, and the stablecoin\u2019s market capitalization is more than $4.8 billion at this writing.&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;It is getting some competition this summer from &lt;a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/freeton.org\/\"&gt;Free TON&lt;\/a&gt;, the fully decentralized blockchain project that took up the Telegram Open Network blockchain\u2019s work once the messaging company that founded it pulled out after a legal battle.\u00a0&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;This summer, Free TON is planning to release a stablecoin sibling to its TON Crystal token. The stablecoin\u2019s liquidity will be 100% backed by locked-in Ether, providing liquidity providers with potential returns. It will have \u201cwidespread application for services with recurrent sub<a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">script<\/a>ions and high-risk offerings,\u201d said TON Labs, the core developer of the Free TON project.&lt;\/p&gt;&lt;h2&gt;What is an algorithmic stablecoin?&lt;\/h2&gt;&lt;p&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;&lt;em&gt;These complex stablecoins use algorithms and smart contracts to protect price stability by increasing or decreasing supply, using market forces to maintain a level price.&lt;\/em&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;The most complex version of the stablecoin is the algorithmic stablecoin, which is not backed by any kind of collateral. Rather, as the name suggests, its value is controlled by specialized algorithms and smart contracts that automatically reduce or increase the supply of tokens on the market to keep the token\u2019s price stable with the fiat currency it tracks. If the market price starts to fall below the value of that dollar, euro or whatever, the algorithms will remove tokens from circulation. If it stablecoin\u2019s value rises above that of the fiat, the system will dump new stablecoins into the market.\u00a0&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;Which is to say, the goal is essentially to create a decentralized and automated central bank that increases or decreases the stablecoin supply as needed to keep the price level.&lt;\/p&gt;&lt;h2&gt;What is an asset-backed stablecoin?&lt;\/h2&gt;&lt;p&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;&lt;em&gt;An asset-backed stablecoin is similar to a fiat-backed one, except that it holds physical assets like gold.&lt;\/em&gt;&lt;\/p&gt;&lt;p dir=\"ltr\"&gt;Commodity-backed stablecoins replace fiat currencies with a variety of other tangible collaterals, notably the traditional store of value, gold. But others are backed by baskets of precious metals, even Swiss real estate. Generally, these stablecoins are linked to a specific amount of the commodity and stored in a known location and frequently subject to outside audits \u2014 something which fiat stablecoin Tether long avoided.\u00a0\n<\/code><\/pre>\n<p>Pax Gold \u2014 an ERC-20 created by Paxos CEO Charles Cascarilla \u2014 is backed by one fine troy ounce of London Good Delivery gold stored in Brinks\u2019 LBMA-approved gold vault in the U.K.\u2019s capital, and can be redeemed for the precious metal. Digix Gold, on the other hand, is one gram of 99.99% fine gold stored in Singapore and audited quarterly.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_fiat-backed_stablecoin\"><\/span>What is a fiat-backed stablecoin?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p dir=\"ltr\"><em>A fiat-backed stablecoin keeps prices level by storing fiat backing each coin on a one-to-one basis.<\/em><\/p>\n<p dir=\"ltr\">The first and simplest stablecoin is fiat-backed, notably the U.S. dollar, as well as the euro, yen and others, at a one-to-one ratio. So long as the underlying currency \u2014 or basket of currencies as Libra originally proposed \u2014 stays stable, the stablecoin will maintain its value. They are, essentially, backed by the \u201cfull faith and credit\u201d of the fiat issuer, with a value defended by that nation\u2019s central bank.<\/p>\n<p dir=\"ltr\">Far and away the largest of these is Tether, with a market capitalization of $62.2 billion at this writing. But other <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/coinmarketcap.com\/view\/stablecoin\/\">leading stablecoins<\/a> include Circle and Coinbase\u2019s USD Coin ($23 billion), Binance USD ($9.6 billion), and DAI ($4.8 billion).\u00a0<\/p>\n<p dir=\"ltr\">Tether long claimed to be backed 100% by U.S. dollars, one to one. After the New York Attorney General sued Tether, it was revealed that 26% was an IOU from the Bitfinex exchange, a sister company. Tether recently revealed its \u201ccash reserves\u201d contain about 3% cash.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Are_stablecoins_controversial\"><\/span>Are stablecoins controversial?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p dir=\"ltr\"><em>While bankers and authorities are seeing stablecoins as a very useful tool, the potential of some tokens to compete with national currencies makes regulators very wary.<\/em><\/p>\n<p dir=\"ltr\">The answer is, it depends on how it\u2019s used and who\u2019s using it. In June 2019, Facebook launched its Libra stablecoin project \u2014 since renamed Diem to ditch a toxic brand. The idea was to create a national currency-backed stablecoin that all of the <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/social-mediaa\/\" data-internallinksmanager029f6b8e52c=\"1\" title=\"Social Media\" target=\"_blank\" rel=\"noopener\">social media<\/a> network\u2019s 2.3 billion members could use for payments.\u00a0<\/p>\n<p>Within days, the responses ranged from very cautious with calls for strict regulation to outrage and warnings of financial doomsday from elected officials, central bankers, regulators, and international financial organizations around the world calling Libra a threat to national sovereignty and world financial stability. It\u2019s been watered down and is moving ahead, but big barriers remain.\u00a0<\/p>\n<p dir=\"ltr\">On the flipside, in January 2021, then U.S. acting comptroller of the currency Brian Brooks issued a guidance letter specifically authorizing banks to use stablecoin networks to facilitate payments and to run nodes, while the EU is working on a broader cryptocurrency regulatory framework that would include stablecoins.\u00a0<\/p>\n<p dir=\"ltr\">So, a stablecoin run by a deeply distrusted and dominant social media network that is seen to be trying to create a global stablecoin capable of bypassing and undermining national currencies? Beyond controversial. Stablecoins used by banks with no interest in disrupting the current world financial order? Not so much.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_stablecoin\"><\/span>What is a stablecoin?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<\/p>\n<p dir=\"ltr\"><em>Stablecoins are cryptocurrencies that use a variety of methods to keep their value fixed.<\/em><\/p>\n<p dir=\"ltr\">Stablecoins are cryptocurrencies designed to maintain the price stability of (strong) fiat currencies while maintaining the security, speed, and low cost of virtual asset transactions. This was initially done to minimize the impact of the price volatility of cryptocurrencies in trading and as a bridge to mainstream spending and financial institutions. Now they are beginning to branch out into mainstream banking to ease the cost and burdens of making payments.<\/p>\n<p dir=\"ltr\">There are <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/stablecoinindex.com\/projects\">four basic types<\/a> of stablecoins. The three centralized stablecoins are backed by fiat currencies, commodities or cryptocurrencies, while decentralized ones rely on algorithms and smart contracts to automatically maintain value.<\/p>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/explained\/how-stablecoins-stay-stable-explained\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;#How stablecoins stay stable, explained&#8221; Stablecoins use a variety of techniques to keep their value fixed, generally to a specific fiat currency like the U.S. dollar. &lt;h2&gt;Can a stablecoin make Ethereum scalable?&lt;\/h2&gt;&lt;p&gt;&lt;\/p&gt;&lt;p dir=&#8221;ltr&#8221;&gt;&lt;em&gt;Crypto-backed stablecoin Free TON aspires to provide a layer-two solution for Ethereum\u2019s scalability problems.&lt;\/em&gt;&lt;\/p&gt;&lt;p dir=&#8221;ltr&#8221;&gt;With overloaded Ethereum increasingly choked by slow transaction speeds&#8230;<\/p>\n","protected":false},"author":1,"featured_media":283125,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1024_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS9zdG9yYWdlL3VwbG9hZHMvdmlldy85YzFkOWM1YzdhMDU3OWVjNGQ0ZWJjODlhMmE2Yzg1ZC5qcGc=.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[],"class_list":["post-283124","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/283124","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=283124"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/283124\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/283125"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=283124"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=283124"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=283124"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}