[Stablecoins] Learn everything there is to learn about stablecoins and why you should use them

I see a lot of confusion on BlackHatWorld about cryptocurrencies, what exactly are they and how to use them.

As a seller that only accepts cryptocurrency as payment option and as a person that keeps 99% of their net-worth on the blockchain, I'd like to share some of my knowledge here, and hopefully answer some of the questions you may have and/or change the way you see crypto.

P.S: I won't go through the whole discussion of "is crypto a scam?", because I'd like to believe we're past that phase.

Okay, let's go straight to the subject.

What is a stablecoin?​

A stablecoin is a cryptocurrency which's price is pegged to a currency. It might come as a surprise to some of you but yes, there are tokens in crypto designed to NOT move in price, and they work!

The most common example of a stablecoin we can notice all over the space is an USD stablecoin, which regardless of what state the market is in, they remain at a $1.00 USD value.

For the purpose of this post, we'll only discuss about stablecoins pegged to the US dollar.

Why makes a stablecoin... stable?​

Very good question, with plenty of good answers. There are multiple ways a stablecoin remains stable, let's discuss the three main ways:



Off-Chain Collateral
_________________



These stablecoins are backed by tangible collateral, and can be claimed for tangible assets.

Let's take BUSD as our primary example, as it is my favorite.

For every BUSD there is in existence, there is $1.00 USD in one of Paxos' bank accounts to account for that BUSD, therefore BUSD is 1:1 backed by US dollars.

A little bit about the other two options:
- USDC is also fully backed by the US dollar, and it is probably the safest stablecoin when it comes to price stability, as it is the most regulations-compliant option on the list. To show a quick example, USDC is the only stablecoin which has blacklisted addresses that have used Tornado Cash once the project was sanctioned and their main developer arrested. For that, it can be the safest option, but the arrest of Alexey Pertsev was an act against free speech in my eyes, therefore Circle's quick action to blacklist all addresses that have interacted with Tornado Cash (even though they were not directly requested by authorities to do so), left me with a bad taste.

- USDT is the most popular stablecoin, with a market cap of $68 billion dollars, and the most liquidity on CEXs and DEXs. USDT is the classic example of "too big to fail". With that said, their spread-sheet is not the best, and it's backing does not come solely from US dollars in a bank account, but from a multitude of collateral options such as: Non-US Treasury Bills, U.S. Treasury Bills, Reverse Repurchase Agreements, Money Market Funds, etc. You can see their transparency report here. Nevertheless, by USDT's latest actions, they do seem to be moving into a more transparent direction, especially after more audits have taken place.


On-Chain Collateral
_________________



These stablecoins are backed by on-chain collateral, and can be claimed for on-chain assets.

DAI is minted through on-chain overcollateralized loans. A bit of a hard term to understand? Let me explain it in an easy way.

For the purpose of this thread, we won't use any real examples, in order to keep the wordcount low and not deviate from the subject too much.

To mint

DAI tokens, one has to open an overcollateralized loan.

Explanation by example:

Andrew is looking to mint 1,000 DAI, worth $1,000 USD. In order to do that, they have to provide, say, $1,350 USD worth of Ether.

Andrew will go to Maker DAO or any platform that allows minting DAI, provide them with $1,350 USD worth of Ether, and in return they'll get 1,000 DAI, worth $1,000 USD.

Now, how does the platform ensure the collateral Andrew put in will not drop in price, say to $900 USD, making DAI undercollateralized?

That's simple, through liquidation, meaning as soon as Andrew's collateral drops in value to a certain level, say $1,100 USD, their Ether will be sold. From those $1,100 USD, $1,000 will be used to buy 1,000 DAI from the market (and then sent to an address nobody has access to, such as 0x0000, a process called "burning"), some US dollars will be kept by the platform for liquidation fees, and the rest will be sent back to Andrew.

This way Maker DAO ensures DAI will always be overcollateralized.

What scares people from using

DAI?

There is only one reason many will refrain from using DAI, and that is that most of its collateral is USDC-based. And remember what I told you earlier about USDC being extra-compliant to authorities? Well, if anyone ever tells Circle to blacklist all smart contracts where USDC is used as collateral for DAI, that would make DAI undercollateralized, as the USDC collateral won't be usable.


Algorithmic Stablecoins
_________________




Algorithmic stablecoins are the new innovation current blockchain developers are trying to introduce.

They're a bit hard to explain, and the terminology is very vague.

I won't go into much details about these type of stablecoins, as they're currently not a very popular option on the retail markets, and the chances you'll have to use one of them is very low.

But for those of you interested in learning more about algorithmic stablecoins, feel free to check Frax's docs section.

So, how does collateralization keep the stablecoins stable?​

A very simple answer.

Since the stablecoins above all have the necessary collateral behind them, each and every one of them can be swapped back to $1.00 USD worth of value, therefore arbitrage is what keeps them alive.

Arbitrage? What do you mean?

Let's say BUSD goes to $0.95 USD for whatever reason, maybe a huge whale sold $1 billion USD worth of Bitcoin in a BTC/BUSD pair, and it made the BUSD price go down in an instant due to lack of liquidity.

If that happens, every crypto trader or arbitrage bot will buy BUSD from the market at $0.95 USD, and claim $1.00 USD in their bank accounts on Paxos', effectively making $0.05 USD profit for every BUSD they buy from the market.

And because every BUSD is backed 1:1 with 1 US dollar in Paxos' bank, they have enough money to pay back everyone. And what happens when everyone buys a token? It goes up in price.

Because the arbitrage opportunists bought the BUSD at $0.95, it's price went back up to $1.00 USD, going back to the peg.

The same principle happens when a stablecoin goes over the peg, to let's say $1.05 USD, any trader or arbitrage bot will sell their BUSD, effectively making a $0.05 USD profit per BUSD, and buy it back once it reaches the $1.00 USD peg.

What about

UST's failure?​

Indeed the UST's failure has left many people with a bad taste in their mouths, sending many of its users into bankruptcy.

UST's failure has scared many people from ever touching stablecoins, and it is the primary example anti-crypto people use when giving arguments about why cryptocurrency is "bad".

The reasoning for UST's failure is extremely simple, UST never had enough collateral for their marketcap.

Yes, UST was never collateralized, meaning if every UST holder wanted to swap their UST for $1.00 USD, they wouldn't be able to, and everyone in crypto knew about that and told everyone else, but retail refused to listen.

Going into the actual story of what happened and how UST "worked" will double the wordcount of this thread, so I won't go into it here, but if the demand for an explanation about that case is high I will make a separate thread explaining exactly why UST went to basically $0.00 USD.

Rest assured, the 5 other stablecoins (

) above do not pose the same risk, especially the two I recommend the most,

BUSD and

USDC.

So, are stablecoins safe to use?​

Yes, of course, as long as you use the right ones.

In my opinion, stablecoins are the main reason blockchains work, because they're the only real option for business and regular users to accept crypto-payments and not have to worry about volatility.

If you're looking to accept crypto as payment option, using stablecoins is what I recommend, crypto payment processors like CoinPayments even offering the option to accept other cryptocurrencies such as Bitcoin, and have them automatically converted to a stablecoin of your choice once the payment is confirmed, so you can accept any available cryptocurrency without thinking of their volatility.

Why crypto as payment option?

Because it is open to anyone, from anywhere. The blockchain is open to all, regardless of their status, country or any difference there might be between us. You do not need approval from anyone to use it, you're the only one that has access to your tokens, and you will always have full access to your money at any point in time, from any location, for any purpose.

The above is only true for blockchains, not for centralized exchanges, do not make any confusions.

Final note​

I really do hope this thread has helped some of you in learning about cryptocurrency and it's real use-cases.

Sadly, at this point in time, most of the things you see online are advertisements of shitcoins and scams, therefore I refuse to blame anyone calling crypto a scam, because the actual information about what crypto is and how it should be used is deeply hidden under the mass amount of scammers looking to make a quick buck.

If you have any questions about stablecoins and crypto in general, let me know, I'll be more than happy to answer them!

Please do not ask me how to make money in crypto. I will not shill any tokens, nor am I in possession of some magical trading strategy.

welder said:

Great share,it’s worthy to learn about crypto much before investing for long term.
Many invest on shitcoins which doesn’t have stable or balance price.

Click to expand...

It's not even investing-related, just about what stablecoins are and how to use them.

You do not need to invest in crypto to use stablecoins, as acquiring something that's designed to remain at the same value isn't really called "investing".