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Stablecoins- How they hold their value

 


Stablecoins have grown in popularity massively in recent years. Coins such as Luna from Terra, Tether or the Binance Coin were able to grow in particular. However, after the massive crash of the Luna Coin, the question now arises as to how stablecoins keep their value stable and how safe they are.


What are stablecoins?

Stable coins are digital currencies that are tied to stable values ​​such as the dollar, euro or gold. These special cryptocurrencies reflect the price of the linked reserve value and are therefore less volatile than classic cryptocurrencies.

Due to their stability, stablecoins often serve as transaction value for crypto and FIAT currencies. Stablecoins are particularly suitable for trading, transactions or the storage of value. Interest can also be generated through stablecoins.

However, they primarily serve the simple and inexpensive transaction of values ​​- especially internationally.


What types of stablecoins are there?

Asset-backed stablecoins  keep their value stability tied to physical assets like gold.


FIAT-backed stablecoins  keep their value stable by investing in the bundle currency at a 1:1 ratio. For example, 1 coin of stable currency X equals 1 real dollar.


Cryptobacked stablecoins  are backed by a kind of fund of different cryptocurrencies.


Algorithmic stablecoins  are programmed by algorithms in such a way that the change in the circulation quantity is constantly adjusted on the basis of smart contracts .


How do stablecoins stabilize?

Through rebasing , the stablecoin adapts to demand. In this way, the amount of tokens is increased when demand is high, while the supply is reduced when demand is low. The number of coins in the wallet is automatically adjusted every 24 hours. If the dollar falls, coins are removed, if it rises, coins are added.


Algorithmic stablecoins cover the price of the token through smart contracts. So many stablecoins are exchanged via smart contracts until the value of the reference is reached.


External backing keeps stablecoins stable by backing the same value of FIAT currencies . In this way, the issuer holds the same amount of dollars as it issues stablecoins.


How could Luna crash?

However, Luna was itself tied to the stablecoin Terra. The two coins should balance each other out. For example, if the Terra coin was overbought, which would have resulted in a price higher than the dollar, Luna sold Terra, which should lower the price and drive the Luna price up. In turn, Terra was to be bought when the price fell below that of the dollar.

The problem, however, was that Luna and Terra could be sold off at the same time, which could have led to a crash. After Bloomberg criticized stablecoins, the prices of the stablecoins collapsed together - Terra and Luna lost their dollar peg.


Stablecoins- A threat to the crypto world?

Stablecoins are essential for the crypto world. They enable cheap transactions to all countries in the world. They also offer an opportunity to store money and preserve value.

As the Terra Luna crash showed, there are also some risks and dangers behind stablecoins. Anyone who invests in stablecoins should be aware of the stabilization measures of the coins.

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