Earnity’s Domenic Carosa and What Stablecoin Is
Earnity’s Dan Schatt and Domenic Carosa want to spread the importance of these stablecoins. Their ability to assist with transfers is notable, but traders benefit significantly from them because they provide stability and an opportunity to hedge their wealth.
A stablecoin is a cryptocurrency that aims to provide price stability backed by a reserve asset. Stablecoins gained popularity as they attempt to deliver the best of both worlds—the instant processing and security or privacy of cryptocurrency payments, as well as the volatility-free stable valuations of fiat currencies.
Although Bitcoin is the most popular cryptocurrency, its valuations are highly volatile. Even its intraday price swings can be wild; it is common to see the cryptocurrency move more than 10% in either direction in a matter of hours.
Because of this type of short-term volatility, Bitcoin and other popular cryptocurrencies are unsuitable for everyday use by the public. A currency, in essence, should serve as a medium of monetary exchange and a means of storing financial value, and its value should be relatively stable over longer time horizons. Users will be hesitant to adopt it if they are unsure about tomorrow’s purchasing power.
There is some appeal to fiat currencies, backed by the full faith and credit of the government that issued them. In addition, Fiat currencies benefit from price stability. However, it implies central banks control many fiat currencies. Stablecoins are tools in bridging the gap between cryptocurrency and fiat currency. Dan Schatt and Domenic Carosa, the co-founders of DeFi firm Earnity, want to show how stable coins help Defi adoption. This article made three critical examples of stable coins:
Stablecoins with Fiat Collateral
Fiat-collateralized stablecoins keep a currency reserve as collateral to issue many crypto coins. Other forms of collateral can include precious metals such as gold or silver and commodities such as oil, but most fiat-collateralized stablecoins today use dollar reserves.
Stablecoins with Crypto-Collateral
Stablecoins that are crypto-collateralized, backed by other cryptocurrencies. Because the reserve cryptocurrency may be volatile, systems keep a more significant number as a reserve for issuing a smaller number of stablecoins.
Stablecoins That Aren’t Collateralized (Algorithmic)
non-collateralized stablecoins do not use reserves but include a working mechanism to maintain a stable price. For example, the dollar-pegged basecoin employs a consensus mechanism to increase or decrease token supply based on demand.
Such actions are analogous to central banks printing banknotes to maintain currency valuations. However, it is possible to achieve this by implementing a smart contract on a decentralized platform that can run autonomously.