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Stablecoins mini-series: Part 1/6

March 4, 2024
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FinMeUp
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FinMeUp

Mini-series Part1: The basics of stablecoins

In this mini-series, well discuss the basics of stablecoins, their main use cases, the various types of stablecoins, the pros and cons of each type, the future of stablecoins, and lastly what went wrong with LUNA. Lets start with the basics: What are stablecoins?

In order to trade, we need consistency in the underlying tool/asset that is being used to facilitate the trade. Think about it the R50 in your pocket is still worth R50 tomorrow. Sure, due to inflation the value of the R50 diminishes over time, but it does so at a slow-ish rate. At this stage, trading with crypto as a currency is very difficult since its prices are extremely volatile. This is where the stable in stablecoins comes into play.

Stablecoins are cryptocurrencies whose values are pegged, or tied, to that of another cryptocurrency, fiat money, commodity or financial instrument. Stablecoins aim to provide an alternative to the high volatility of cryptocurrencies which has made such investments less suitable for wide use in transactions. The most popular stablecoins are USDT ($72 billion market cap), USD ($54 billion market cap), BUSD ($18 billion market cap), all linked to the US Dollar.

Stablecoins allow for the convenience of cryptocurrency which means fast settlements and fewer regulatory hurdles, along with the stability of the fiat currencies. Due to their inherent digital nature and ties to traditional crypto, stablecoins possess powerful properties:

  • Stablecoins are open, global, and accessible to anyone on the internet, 24/7
  • Theyre fast, cheap, and secure to transmit
  • Theyre digitally native to the Internet and programmable

In the next article, we will investigate the main use cases of stablecoins and how you can benefit from using this technology. Stay tuned!


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