Misconception about Stablecoins

stablecoin

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2023-08-30

Stablecoins have appeared in the cryptocurrency market for a long time, revolutionizing the Crypto world and becoming the main means of payment for most users. However, there are still many people who do not really understand the mechanism of Stablecoins and how they operate due to the rapid development and constant change of the cryptocurrency market, creating difficulty keeping up with information and misinformation. Let's take a look at misconceptions about Stablecoins that you may have.

All Stablecoins are asset-backed in US Dollars (USD)?

This is completely misunderstanding. Perhaps because most Stablecoins in the cryptocurrency market are often pegged to the US Dollar (USD), many people who do not have enough knowledge about Stablecoins will assume that Stablecoins are not backed by US Dollar is scam Stablecoin and also unstable.

The truth is that not all Stablecoins are backed by US Dollars (USD). That's right, there are many Stablecoins that use fiat currencies other than USD but still operate completely stable.

Importantly, a Stablecoin is a cryptocurrency designed to maintain the stability of its value. To achieve this, some Stablecoins are backed by traditional currencies such as USD, but there are also stablecoins backed by other traditional currencies such as EUROC-(EU), XSGD-(SGD), VNDC-( VND)...

Additionally, Stablecoins can be backed by a range of different assets such as energy, commodities, or even other cryptocurrencies. This helps reduce the risk of over-reliance on a single source of supply and creates diversification in the source of value.

Any fiat currency can serve as a reserve asset for Stablecoins?

Although most Stablecoins use fiat currencies such as USD, EUR or JPY as reserve assets, that does not mean every currency is suitable as a reserve for a stablecoin.

The choice of fiat currency as a reserve asset for stablecoins depends on the mechanism and goals of each specific type of stablecoin. Fiat currencies must ensure stability and trust to ensure stablecoins are able to maintain a stable value and do not face major risks during operation. If currencies that do not have much strength and have high inflation become reserve assets, facing price fluctuations due to macroeconomic conditions, international financial impacts of global inflation. Demand will directly affect stability - the core value of stablecoins.

Furthermore, the use of fiat currency as a reserve asset also depends on legal regulations and other factors in each country or region. Some countries have restrictions and regulations on using fiat currency as a reserve for cryptocurrencies, which narrows the possibilities of stablecoins and directly affects stablecoin users

Therefore, it is wrong to assume that any fiat currency can serve as a reserve asset for a stablecoin, and choosing the right fiat currency is an important and complex decision in the development and operation of stablecoins. issue a stablecoin. Therefore, users need to pay attention to the collateral assets of a stablecoin to make investment decisions.

Stablecoins all have the same mechanism?

This is also one of the misleading definitions of stablecoins. Maybe most users often use stablecoins like USDT, USDC or BUSD with the mechanism of using fiat currency (USD) to ensure the stability of that stablecoin, but the truth is that stablecoins have many other mechanisms besides how to use fiat money to ensure its stability.

This deviation makes many people believe that if a Stablecoin is not backed by a fiat currency (Fiat) guarantee mechanism, it means that the Stablecoin is unstable, unreliable and fraudulent. Here are some other mechanisms:

  1. Stablecoins backed by commodities

These Stablecoins are similar to fiat-backed coins, however instead of using fiat, this asset class uses other assets and tradable goods as collateral. These assets include precious metals and minerals such as gold, silver, diamonds; valuable goods such as oil, natural gas; exclusive real estate, etc.

2. Stablecoin backed by cryptocurrency

This Stablecoin is backed by cryptocurrency instead of fiat. This type of stablecoin uses cryptocurrency as collateral, so the entire operating process and operation of this currency on the blockchain is decentralized. Typically, crypto-collateralized stablecoins are pegged at a 1:2 ratio.

A larger amount of cryptocurrency will be collateralized for each stablecoin due to high price volatility. This way, the stablecoin supply will not be affected by extreme price fluctuations. However, this type of stablecoin is not as popular as fiat-backed stablecoins because of the complexity of cryptocurrencies. In addition, this type of Stablecoin is also known as “over-collateralized” due to the large number of coins in reserve.

3. Stablecoins backed by algorithm

This is a non-collateralized Stablecoin and is not backed by fiat currency or cryptocurrency. Instead, they maintain stability through an algorithm or mechanism. The smart contract is responsible for managing the supply and demand diagram and ensuring the exchange rate stability of this stablecoin. The algorithmic system will create new coins if this stablecoin is traded too much. Otherwise, the system will buy coins on the market to cut down on the circulating supply, but this algorithmic system is quite similar to the supply management process of central banks.

4. Stablecoins an others Cryptocurrencies

Stablecoins are not exactly like other cryptocurrencies. Although both are digital currencies that operate on blockchain technology, the main differences between Stablecoins and other cryptocurrencies are value stability and price variability.

While other cryptocurrencies such as Bitcoin, Ethereum, etc. are often highly volatile, their value can change drastically in a short period of time. This is because the value of these currencies depends on market supply and demand and the investment psychology of users. The strong volatility helps create opportunities for high profits but also brings great risks for investors.

In contrast, stablecoins are designed to keep their value stable or less volatile. Some stablecoins are backed by traditional currencies or other collateral, while others rely on technical mechanisms to maintain value stability. Value stability makes Stablecoins a useful option for day-to-day transactions and value storage in volatile cryptocurrency market environments.

Therefore, it is incorrect to assume that stablecoins are identical to other cryptocurrencies, as they adhere to value stability without the large fluctuations of other cryptocurrencies. This makes Stablecoins a useful tool in using cryptocurrencies in everyday transactions and asset management.

5. Risk Free

Every type of investment and asset has a degree of associated risk, and Stablecoins are no exception. While Stablecoins are designed to keep their value stable and avoid sharp fluctuations, they are not completely risk-free. ro.

Based on the type of Stablecoin and its value guarantee mechanism, there are a number of potential risks that users need to consider:

  • Technical risks: Stablecoins rely on blockchain technology, and may face technical issues such as errors in source code, hacker attacks, or system failures.
  • Market risk: Although stablecoins are designed to keep their value stable, their value can still be affected by market fluctuations and the volatility of reserve assets.
  • Legal Risks: Stablecoins may encounter legal and regulatory issues in certain countries or regions, reducing their legality and usability.
  • Operational risk: If stablecoins are not tightly regulated or do not have proper oversight, there can be issues related to asset management and the risk of maintaining stability.
  • Liquidity risk: Depending on the type of Stablecoin, its liquidity may be low, making it difficult to swap and use in transactions.

Conclusion

Users and investors need to carefully consider and research before deciding to invest in any Stablecoin. This helps them avoid costly mistakes due to not clearly understanding how this cryptocurrency works. At the same time, it is necessary to always consider risk factors during the investment process, cultivate your own knowledge, in a potentially highly volatile and rapidly developing market like cryptocurrency.

About VNST

VNST is a decentralized stablecoin with transparent on-chain data, guaranteed by the stable value of the most popular and reputable stable coins in the global crypto asset market. The stablecoins that ensure value for VNST have transaction volume and stability proven over a long period of time, issued by reputable organizations with proven potential and periodically audited. VNST will be a safe, reliable solution, providing diverse and convenient choices and expanding future applications for users in the Web3 field in Vietnam and around the world.

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