And how do you keep Stablecoins at that price? The most crowded question among cryptocurrency lovers.
First, an equivalence to this type of currency is set with a national legal tender such as the dollar or the euro, yes! but who ensures that it stays fixed? Well, a reserve equivalent to the cryptocurrency created is maintained, that is, for every stable cryptocurrency that is created, it must always have a dollar or euro in reserve. Basically what you do not currently do in the federal reserve or central bank (this has caused doubts and controversies among users and accuse these cryptocurrencies of printing money from nothing).
We can see that these currencies do not have the exact parity with the euro or the dollar are sometimes above and sometimes are below the value, this is because in the same way as the rest of the cryptocurrencies when they exchange their value. It is marked by supply and demand although its price tries to go fixed to that of the dollar or euro, the market can generate a demand higher than the available supply so the price will increase and exceed 1.00.
For example we have hundreds of users who they want to buy it because they need to be the first, so they don’t wait, the impatience of obtaining it before the rest makes them give themselves the task of offering more than 1.00 and give 1.01 (ready or dumb?). Now its value will be higher than of the currency that backs it up and fluctuates based on supply and demand. When the value of Stablecoin exceeds unit 1.00, the issuing company needs to generate more new currencies to meet that demand and prevent the Price continues to rise, that is, it invades the market with new Stablecoins.
It also happens when Bitcoin and the market collapses, users flee wanting to protect themselves in a safe and stable value that can move easily so Stablecoin demand tends to increase. In the same way the opposite can happen, that there is a force too high and the price is lower than the unit, if users do not need their Stablecoin the demand decreases and users are willing to pay less for it. For that certain amount must be withdrawn from the market to return to shortage by decreasing the offer, usually given when we are in a financial market, users tend to protect themselves at least in an investment, so they do not need a shelter value like technology and that is why we see some Stablecoins with a value of 0.9 and sometimes 1.03 for example.
The first 5 stable currencies are all linked to the US dollar, the opportunity of the other 180 national fiat currencies used by most of the world has barely noticed. That’s where the next frontier for stable currencies is. The Tether are the most used Stablecoin and they are backed by a dollar, it is not decentralized, there is a company behind it managed by several people and they have fiduciary accounts where that Fiat money rests, that is the risk when it is not registered in a blockchain.
In next part we will discuss about 6 important Stablecoins.
Sources https://coincodex.com/stablecoins/ https://cryptoslate.com/cryptos/stablecoin/ https://www.blockchain.com/ru/static/pdf/StablecoinsReportFinal.pdf