Do you know what a stable currency is? Come on, I'll tell you! part three by Karupanociten

Again together talking about cryptocurrencies, what a thrill! In our previous article, we were reviewing two methods that stable coin creators use to guarantee the value of their cryptocurrencies, the first through the use of fiat currencies as collateral, the second through the use of stones, precious metals, or commodities.

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But what would you think if I told you that there are stable coins that do not have a tangible guarantee and are still reliable and maintain their store of value? No, it is not a scam, it is the vast universe of the blockchain in which each problem generates a brilliant solution, do you want to know how this is achieved? How can a currency be guaranteed without a tangible good that supports it? I invite us to learn together about stable coins in this third and last? delivery of this fascinating subject.

The power of crypto assets as collateral

Many see cryptocurrencies only as a payment mechanism or as a numerical representation of the values ​​that we have stored within the blockchain, literally as a digital currency whose value will be represented by what the market indicates at a certain moment, but the truth is many crypto assets are more like security (stock) of a company than a currency, so the more solid the project (company) is, the more value it will acquire and therefore increasing the interest of investors.

Under the previous premise, the Crypto-Backed or tokens were created whose guarantee is made up of other cryptocurrencies that have a large market capitalization or whose project is very solid and has the confidence and support of investors, such as Bitcoin (BTC), Ether (ETC) or Tether (USDT), by the way, the latter is a stable coin.

Crypto-Backed manage to maintain their stability by backing the token through a 2:1 relationship with the crypto asset that serves as a guarantee, in this sense what is sought is that Crypto-Backed is backed by a diverse portfolio of other assets that represent for what less double the value they support, this allows that despite price variations in the market, the value remains constant, through the use of smart contracts that "anchor" a certain amount of crypto assets owned by investors or users of the Crypto-Backed.

A typical example of this type of stablecoin is the MakerDAO (DAI), an ERC-20 project that guarantees its value based on smart contracts called Collaterized Debt Position (CDP), which allow Ether (ETH) to be used as collateral. when new DAIs are issued.

A very smart way to manage supply and demand

Another type of stablecoins does not make use of guarantees that support and sustain its value, but instead uses powerful algorithms known as “smart contracts” and the basic principles of supply and demand to keep its value stable, this type of stable coin is known as Seignorage Coins.

These types of projects use the so-called “Seigniorage Shares” or seigniorage actions to keep the price of the tokens stable. Seigniorage Shares are not traded, but rather they decrease or increase their circulating amount through the use of smart contracts that generate processes of "burning" to increase the value or issuance to make it decrease, in this way the number of shares of Seigniorage will be adjusted automatically as the market moves (supply and demand)

In other words, when there is an excess of liquidity (many currencies in circulation) its price tends to fall, so the smart contract will “burn” the amount of “Seigniorage Shares” (currencies held by the issuer) necessary to make the price increases, otherwise, the value increases too much due to a shortage of the currency, then new “Seigniorage Shares” will be issued that cause the price of the stablecoin to decrease.

Now that we have learned a little more about how stable coins work, I would like to know your experience in this regard, did you know how they worked? What are the stablecoins that you know, do you have any? What do you think about the crypto that has support in others? tokens ?, come on I'll wait for you in the comment box!