What are stable tokens?
Tags: Blockchain, Blockchain Development, Stable Coin

Cryptocurrencies are highly volatile and change their values rapidly in short time frames. For example, you have bought $1000 worth of ICO’s token the previous week, and today you woke up to find out that your tokens worth less than $500. This means you have lost 2x value in a week’s time. This problem can potentially be solved by the use of stable tokens.

The concept of Stable tokens is fairly simple. To understand this concept let’s take an example: consider the value of currency say USD (US Dollar) and build a token that always has the same value as that of the currency USD. So, 1 tether token = $1 USD. It is not uncommon to see up to 10% variations in cryptocurrency in a span of a few hours. This short-term volatility makes cryptocurrency difficult for everyday use by public.

Ideally, a cryptocurrency must maintain its purchasing power and should have the lowest possible inflation rate that is sufficient enough to encourage spending the tokens instead of saving them. Stablecoins provide a solution to achieve this ideal behavior.

Stable tokes are one of the most important type of currencies due to their purely practical aspect. Thought stable tokens are great in theory, they are not easy to implement. They have certain challenges and technical considerations. Stable token received traction as they offer both instant processing and security of payments, and the volatility-free stable valuations of fiat currencies.

The biggest challenge with stable tokens is that no currency ever has a stable value.

Now let’s understand the concept of stable tokens in deep-

There are 3 factors that affect a country’s currency:

Import and export of the country Health of economy Inflation

Currencies used by countries can be broken down into 2 types:

Fiat currency whose value is backed by the government that issued it. Commodity backed currency that derives its value from a commodity like silver and gold. Earlier the US dollar used to be backed by gold that was held in the federal reserve. However, President Nixon in 1971 changed the commodity-backed currency to a fiat currency. Now, this completely separated the value of gold and the US dollar. Though this led to a lower purchasing power of gold, but the economy got independent of the gold supply and demand. And now the government was better able to control the value of the currency.

Now, why was a commodity-backed currency not suitable?

The commodity-backed currency had certain drawbacks, such as its supply could be manipulated without oversight from the government. The commodity-backed currency is highly vulnerable to large price variations. For example, if some gold reserves are uncovered, or when people or organizations would hoard large amounts of gold, the prices suffer huge shocks.

The benefit of fiat currency is that the controlling government body was able to control one of the factors influencing the current stability that was the total supply.

How do stable tokens help?

Stable tokens are similar to commodity-backed currencies whose value can be associated with multiple different assets. Certain stable token are backed by silver, gold, or even the US dollar. Since the US dollar is quite stable unlike ordinary cryptocurrency, it offers some measure of stability.

Another interesting usage of stable tokens is to act as a reserve currency in case something drastic happens in a cryptocurrency ecosystem. For example, if someone has to implement a loan in a smart contract in Ethereum, the person could technically insure this loan using a stable token. And if the loaner is not able to repay in time, the interest can still be calculated based on a relatively stable store of value. This allows us to use the decentralized nature of Ethereum to automate transactions instead of it going through a bank while still maintaining the ability to insure such a loan.

How do stable token work?

The implementation of stable tokens requires some technical considerations on how to control their supply. The considerations include establishing two tokens, one stable token, and another regular cryptocurrency with a stable token acting like bond and regular cryptocurrency acting like share. A bond is a very stable store of value while a share is a highly volatile store of value. And at any time when the value of the cryptocurrency varies too much, the supply can be controlled by exchanging them with a certain amount of stable tokens. And if the value falls too rapidly, the issuer of tokens can purchase the stable token for a fixed no. of cryptocurrency and then destroy the excess cryptocurrency thereby increasing the value of each existing crypto token. And if the value rises too rapidly, the reverse happens and more of cryptocurrency is generated.

This way stable tokens can be used to regulate the supply of another token to curtail heavy inflation or deflation.

Visit us at corum8.com for more details about cryptocurrency development, marketing and crowdfunding services, contact us at info@corum8.com.

WhatsApp/ Skype Number: +16506810218