Stablecoins: Advantages and Disadvantages

Stablecoins: Advantages and Disadvantages

Virtual currencies have positioned themselves among the first places in the investment world, being one of the best gifts that blockchain technology has brought us. However, cryptocurrencies are not perfect, they have a major flaw.

This defect is the volatility and instability of its value. This factor prevents, in many cases, new investors from entering the world of crypto assets.

However, for some a solution to this is stablecoins.

Stablecoins are a class of cryptocurrency that maintains a constant price and with very low volatility.

This is because its value is anchored to a raw material, such as gold, or to a fiat currency, such as the dollar, for example.

This kind of virtual currency has many advantages, but also some disadvantages.

Advantages and disadvantages of stablecoins

As just mentioned, a stablecoin can find its value stability by anchoring itself to different elements. Therefore, although it may be thought that all stablecoins have a similar algorithm, in reality that is not the case.

Stablecoins can be protected by a large number of mechanisms, each of which has its own pros and cons, which are very important to know.

Stablecoins are usually classified into four categories, which are:

Stablecoins backed by fiat currencies.

This is one of the most common ways to safeguard the value of a stablecoin.

Basically, it is a digital expression of the fiat currency.

This form of stablecoin maintains the same value as the real currency that is backed by banking systems.

Therefore, if the currency in question is worth one dollar, the stablecoin will also be worth one dollar and will hold that value stable.

This kind of stablecoin is pretty simple. However, it removes the feature of decentralization.

Positive aspects.

Great stability, since the fiat money that supports it has the support of a government.

Much simplicity, since all aspects of its operation can be understood very easily.

Negative aspects.

Being protected by fiat money, its structure becomes centralized, which goes against one of the main attributes of blockchain, which is to get rid of centralized systems.

You will have to blindly trust the entity that backs your stablecoin, something that contradicts the nature of crypto assets.

Regulations - When using fiat money as backing, the stablecoin holder must adhere to certain rules and regulations.

Backed by physical assets.

This class of stable currency is backed by materials such as gold, gas, oil, among others. Always for a product that maintains a stable cost in the market.

In many cases, people keep a product as a backup in case of an emergency, gold being one of the most common.

Gold is in high demand and is a highly tradable commodity.

Therefore, many stablecoins use it as a backing for their value.

Coins anchored to gold will maintain a fixed value assigned to each coin at all times.

In this way, a stable coin can represent a gram of gold that is stored in a high security vault, or in many cases in the hands of third parties.

Therefore, you may want to take this into consideration in advance if you want to invest in this class of cryptocurrency.

It is worth noting that it is not as popular an investment option as fiat-backed currencies, but it is still a good option.

Positive aspects.

They are backed by a physical, real and tangible asset. So you can exchange your stablecoins for the product at any time.

The cost of the raw material almost does not change, so you have an extremely high price stability.This makes them a very safe long-term source of investment.

They offer great market liquidity.
Negative aspects

This type of stablecoin needs a large number of intermediaries, such as sellers, custodians of the raw material and so on. This has the consequence that it ends up becoming a centralized system.

To be sure that everything is under control, you must attend audit sessions, something that takes a long time and contradicts one of the main ideas of cryptocurrencies.

Backed by other crypto assets

In some cases, stablecoins may be backed by other cryptocurrencies. Usually, some of the most famous on the market are used, such as Ethereum or Bitcoin.

A single virtual currency is hardly ever used to hedge the stablecoin, instead a combination of these is used, reducing volatility.

Thus, if the price of a specific currency plummets, the others are there to maintain the cost of the stablecoin.

At the same time, they boast some of the most striking features of digital currencies, such as decentralization.

Positive aspects

All operations are stored in a register, so they offer total transparency.

You can convert your cryptocurrencies to any other on the network in a very simple way, which increases its liquidity.

Any user can use them to conduct business.
So its operation is very efficient.

It presents a decentralized and reliable system.

Negative aspects

Being backed by crypto assets, there is always a risk of instability.

The minting process is quite complicated.

Your settlement can be instantaneous, which is a double-edged sword, as prices can change unpredictably at any time. As a point of study, we can see the case of what happened to DAI in the face of the price drop on the so-called “Black Thursday”.

Backless Stablecoins

This class of stablecoin has no endorsement of any kind, instead they make use of an algorithm to stabilize its value. At the same time, the expansion and limitation of currencies in the market is controlled.

If demand rises, more coins are minted, thus stabilizing the rise in crypto asset costs. The purpose of the algorithm is to keep the value of the stablecoin around one dollar at all times.

Positive aspects

Since everything is supervised with algorithms, it is said that the system is decentralized and without the influence of third parties.

It has no assets to back it up, so there is no need to worry about price fluctuations.

Statistically, it is the most stable stablecoin class of all, the algorithms take care to ensure that there are neither too many nor too few coins on the market.

Negative aspects

While algorithms keep the whole system working, it is a very sophisticated and highly complicated process that can fail at critical moments.


Informative writeup about Stablecoins. But still centralized. Decentralization is what we crave.

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