MCS | What is Stablecoin?

MCS | What is Stablecoin?


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What is Stablecoin?

A stablecoin is a cryptocurrency with a stable value. Compared to cryptocurrencies with high volatility, such as Bitcoin and Ethereum, a stablecoin value is relatively stable, and it is widely used as a transaction broker in the current cryptocurrency market.

Currently, there are numerous stablecoins in circulation in the cryptocurrency market. According to Coingecko data, the current stablecoin market cap has surpassed $100 billion, with USDT ($65.93 billion), USDC ($274.73 billion), and BUSD ($12.24 billion) taking the 1st, 2nd, and 3rd places by market cap.

Source: Coingecko

Type of Stablecoin

Currently, stablecoins can be divided into 3 different category.

One is a centralized stablecoin similar to the USDT mentioned before, a stablecoin issued by a centralized institution with fiat currencies such as dollars or other stable assets as collateral. Currently, the most used centralized stablecoin in the cryptocurrency market and the largest market share is USDT used by MCS.

Stablecoins issued by centralized institutions currently occupy the largest share in the cryptocurrency market. Still, due to opacity and regulatory risks, the method of staking on-chain cryptocurrency assets to issue stablecoins has emerged. It is a staking-type stablecoin. An excellent example of a staking-type stablecoin is DAI, which matches the value of the dollar 1:1 issued by MakerDao in 2017. Users need to stake assets on the Ethereum chain to MakerDao and generate DAI to immediately replenish additional assets when the value of the staked asset declines. Otherwise, there is a risk of automatic liquidation.

A staking-type stablecoin requires staking of many on-chain assets to create a stablecoin, reducing asset utilization. There is no need for collateral or staking and a mechanism to control the elastic supply to solve this problem. Algorithmic stablecoins were born through a representative algorithmic stablecoin, the UST issued by Terra, which maintains a value of around $1 as a dual means of the market and algorithm. Algorithmic stablecoins still have many problems to be solved. Still, they are expected to play a significant role in the future development of stablecoins due to their advantages, such as decentralization and high asset utilization.

Why Stablecoin is Important?

Since cryptocurrencies such as Bitcoin and Ethereum have high price volatility, they have limitations in the application as a payment method in daily life. Stablecoins can replace cryptocurrencies that are relatively stable in value and, to some extent volatile, and have a high potential as a payment tool in the future blockchain world. In addition, stablecoins have characteristics of transparency, safety, speed, low cost, and privacy compared to fiat currencies, so it seems that they can be conveniently used in various fields such as global payments and remittances.

As the cryptocurrency market is thriving, the demand for high-value transactions is also increasing significantly. In addition, some countries have issued policies prohibiting the exchange of cryptocurrencies into fiat currencies so that stablecoins can be used as a transaction broker to respond more quickly when there is severe volatility in the cryptocurrency market and avoid the cumbersome process of exchanging fiat currencies. Since stablecoins are relatively stable in value, they are not affected by the extreme price movements of other cryptocurrencies. And to some extent, regulatory risk can be avoided.

In this article, I have briefly explained the stable-related contents. For more information on cryptocurrency, please visit the MCS official blog.

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MCS Team

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