What is a stable coin?
Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the
stablecoin, relative to some “stable” asset or basket of assets.
Stable Coins have been invented as a concept to fullfil cryptocurrencies financial system role. Since the vast majority of cryptocurrencies (both PoW and PoS) are highly volatile and cannot be easily traded and exchanged as a currency. Stable coins, the stable cryptocurrency that maintains an extremely low volatility rate and that is tied to something stable, to make sure it’s price on the market stays the same.
Shouldn’t be, because the fiat currency you day to day use, is a stable coin itself.
Instead of a bank controlling the money supply to make sure that the currency price stays the same, in case of national currencies, the government decides this.
Everything is based on simple economic fundamentals, if there are 3 people that want the 1$ banknote, and there is only one 1$ bill left. The purchasing power of the 1$ bill will rise, to stop that from happening the government issues more 1$ bills.
If only 1 person wants the 1$ bill, but there are three 1$ bills out there, the purchasing power will lower. To combat this, the government will destroy some of the total bills in circulation, to keep the price at a stable point. This creates stability, and if you buy something with 100$ now. If you sell it one year in the future for the same price, you know that the purchasing power of the 100$ has not changed at all.
This is the thing that makes currencies great, and is the one thing that is missing in most cryptocurrencies.
How do cryptocurrencies deal with this?
Cryptocurrencies apply the same principals to the blockchain world. This has created 3 different types of stable coins.
Fiat collateralized stablecoins are the most simple type of stablecoins, the “backing” for the stability of this coin is real dollars stored in banks. For 100 Tether to exist for example, there have to be 100 USD stored in a bank. When you want to transfer your money from Tether to USD, your 100 Tether get liquidated and you receive the USD, and vice-versa. This creates great stability to the stablecoin, because every 1 Tether has 1 USD to back it up.
Of course this creates 2 big problems:
Lack of transparency
Crypto-Collateralized Stablecoins are backed by funds of other cryptocurrency. This method allows for full transparency, decentralization and efficiency. But since the majority of cryptocurrencies are speculative and unstable, something must be done to prevent making the stablecoin unstable as well. Where as in the tether example, one tether is always backed by a one dollar. In crypto-collateralized stablecoins the situation is different. For example, for 1$ of Dai Stable Coin, there is 2$ worth of ETH to back it up. So in case ETH’s price drops, there is a safe-space that ensures that Dai’s stability and price remains the same.
Non-collateralized stablecoins depend on smart contracts to sell tokens if the price falls below the peg or if the value rises to supply tokens to the market. Similar to what the government is doing with national currencies, but instead of a central authority doing it, it is ensured by a decentralized smart contract. The token stays stable and retains its peg in this manner.
All 3 types of stablecoins have the same goal in sight, to create a stable and efficient cryptocurrency that can be utilized by everyone. EPIC CASH and EUSD can and will utilize the best of all 3 worlds, and create a truly efficient stablecoin.