Guide to Fiat-collateralized StableCoins with 2019 Complete Guide!
Part 2 of 7
Enjoy shorts from my book while, Kyle Rea of cREAtiveCastleStudios finishes the graphics!
If you haven’t read the first part of this, you may catch up so on my post here.
Simply stated, a StableCoin is a cryptocurrency pegged to another asset. Or, a global digital currency solely unrelated to a central entity. StableCoins make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold.
Now let’s move on….
Types of Stablecoins: Asset-Collateralized vs. Non-Collateralized
Define Asset-Collateralized StableCoins.
The socially agreed upon currency most countries use is termed ‘fiat’, which literally means ‘something that was created without effort.” Until 1971 world currencies were backed by gold. Before printed money; diamonds, silver, gold, land, estate and other goods were used as means for barter. Shifting from an asset backed currency to the current fiat system left centralized banks, governments, financial technologists, private entities, and economic experts with the concept of Asset-Collateralized StableCoins. These specific StableCoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure and stable daily transactions. Stablecoins in this category should be guaranteed to exchange 1 : 1 StableCoin for its underlying asset.
Define Non-Collateralized StableCoins.
One argument states, fiat is not backed by any tangible asset, therefore; why should cryptocurrency only have value as an asset-backed currency? An opposing argument suggests currency merely must have an agreed upon “value” to be successful. Non-Collateralized Stablecoins were created as a medium. This category of digital currency is not backed by any “real-world” or cryptocurrency asset; but instead, maintains value by its users expectations of maintaining a certain value. The only current noted Non-Collateralized approach is the Seigniorage Supply (Algorithmic) StableCoin Model.
I’ve separated StableCoins into three different categories. three are Asset-Collateralized, one is Non-Collateralized and the remaining group is a Hybrid category. This is in hopes of a more simplistic understanding for us all. *see photo*
The first Asset-Collateralized StableCoin we shall discuss is;
The most simplistic scheme for a StableCoin is a Fiat-Collateralized StableCoin. This token is a 1:1 ratio cryptocurrency backed by fiat or “money”. StableCoin is created when fiat is held by centralized issuer and destroyed when fiat asset is received. This digital currency system makes transactions safe, fast and secure, therefore can be utilized on a daily basis by any consumer.
- Efficient. Some benefits of Cryptocurrency; Convenient, fast and secure conversions.
- Simple. Fiat-backed structure is easily understood.
- Stable. Government backed fiat currencies ensure underlying prices won’t fluctuate wildly.
- Centralized. Centralized systems are prone to various vulnerabilities and risks. (Ie. single point of failure, bankruptcy of the central entity and moral hazards) Using a centralised structure negates a key principles of cryptocurrency; decentralization.
- Requires Trust. Requires trust in a third party to hold sufficient fiat collateral. The central entity needs to be trusted for the fully-functioning of the system; this idea goes against the principle of cryptocurrencies; a trustless means of exchange.
- External Audits Needed. For transparency of funds accounts must be verified. Auditing is required to make sure appropriate amount of collateral is being held, this can be a tedious and expensive process.
- Regulations. Fiat-involving processes require greater oversight and regulations. This will complicate and possibly compromise efficiency of the cryptocurrency adoption process.
- Old Technology. Relies on traditional fiat currency payment systems, which are slower and more expensive.
A Fiat-Collateralized StableCoin issuer accepts a deposit in fiat. Receiver is issued one unit of StableCoin for every dollar it receives. 1:1 ratio. The digital currency is effectively an IOU for said asset. If one decides to liquidate their StableCoin tokens, the coin issuer transfers fiat and “burns” the StableCoins when asset is dispensed.
Cryptocurrency advocates often criticize asset-backed stablecoins because of their inherently centralized nature. If one company owns a mass amount of desired asset, that company is able to control the stablecoin, price fluctuations, and policies.
This model becomes risky if a coin cannot be claimed for fiat, or there’s low confidence the asset doesn’t fully lie within the central entity. It also must operate on a fractional reserve based system. Fiat-Collateralized StableCoins are also prone to destabilization from external factors; many geopolitics and regulation.
Tether has long been the subject of accusations that not only is it used to increase the price of Bitcoin, but also Tether Limited has been accused of not holding sufficient USD reserves to backup the cryptocurrency. Tether asset has a $2B+ market capitalization, which means Tether Limited, in theory, should have an equal amount of fiat in one or more accounts. Tether’s insolvency continues to circulate.
End to sneak on Alyze Sam’s 2019 Complete StableCoin Guide
This concludes the small ‘short’ from an upcoming E-book. Stay tuned for more, and help a lady trying to serve the Women In Blockchain and The Tech News community out. How?
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Special thanks to my new BFF and fellow Rick Sanchez C137 nerd, Matthew Bardeleben
MattyB3 actually wrote an article here on Medium that caught my attention. Related to his informative and entertaining talent, I reached out and asked if he’d collaborate with me as a personal favor. I tricked him and this upcoming Ebook is the result! YES! (Haha) He’s been a great blessing! From running around editing my chatty-word salad, to giving incredibly gifted content, he’s a huge asset. I can’t wait to work more with him on as many articles as he’d like!
You can find this brilliant goofball ball giving away free education in these locations;
Who’s going to be in sunny San Francisco, CA the last week of March?
My good friend and new business partner, Wesley Williams is an extremely impressive, multifaceted attorney and blockchain genius. Wes and I will be speaking for TheBlockchainSociety.ca and Deloitte.
I am partnered with CryptoCentral.io We are proud sponsors of this event and hope to do more in the future.
Wikipedia noted- awarded entertainer, Live Crypto trader/educator, and my work hubby “Goku” aka Kyle Rea will also be joining us.
This is a private event, but if you’re interested, give us or the TheBlockchainSociety.ca a shout out. @visnuth is a wonderful gentlemen, we can’t wait to meet in person.
I hope you’ll tune in. We are road tripping together. Filming. This will be fun for everyone. Hehe