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Last updated on July 27th, 2020 at 08:08 am

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Many at times we ask what is stablecoin and how it works. So now, you can read and understand what is stablecoin and how you can make money off stablecoins.

Most cryptocurrencies are known to have a volatile price. Most of them are not only meant to serve as a medium of exchange but also as a store of value. Cryptocurrencies like bitcoin which is considered the base cryptocurrency is too volatile.  

The volatility of cryptocurrencies have given rise to the need of a stable cryptocurrency referred to as stablecoin. 

What Is Stablecoin? A Short Summary:

It is a cryptocurrency backed or pegged 1:1 to a fiat currency.  It is not affected by volatility of the cryptocurrency market. It was created to aid ease of cryptocurrency transfer to fiat pairs. 

Stablecoins work in different ways and have different types. So we have algorithm stablecoins and collateralized stablecoins. Let’s take a look at each of these types of stablecoin.

Types of Stablecoin:

Collateralised Stablecoins are usually a sort of collateral loans controlled by the issuer for the user. It is usually pegged or backed with funds to a real fiat. The issuing company tries to make the public belief that the token( collateral loan) is really pegged to a fiat by pegging it to any fiat currency.

In the case of collateralized stablecoin ABCD, the token is pegged 1:1 to Nigerian naira. The token issuer collective’s funds is to be audited each month by a certified independent accountant.

This is to ensure trust around the use of the token. Moreover, ABCD stablecoins are created on naira withdrawal request and burned on naira deposit. 

The collateralized stablecoin ABCD is a cryptocurrency token that is: 

  • Issued by a trust company, $ABCD Collective.
  • Strictly pegged 1:1 to a real world asset, fiat currency (Nigerian Naira).
  • Built on the Binance Chain network (1), a Byzantine Fault Tolerant and Proof of Stake consensus network, through its token issuance protocol.

There is a type of collateral loan coin (collateralized stable tokens) that is backed by one or more cryptocurrencies. This form of collateral is easier to audit because the company’s balance is accessible on the public blockchain.

The other type of stablecoin is called Algorithm Stablecoins. These ones have it’s supply controlled by smart contracts. The smart contracts act like a central bank manipulating the supply to keep the price stable. This is how it works.

The smart contract will mint more tokens when there is increase in demand for the token to prevent it’s price from increasing. 

The same smart contract will remove the coin from circulation when the demand for the coin decreases. This will bring the coin’s value to normal supporting it’s use.

You might be wondering how the issuers of this coins make money. There are various ways they can make money from the coins. Some company might charge fees to use its stablecoins, some others might use it as a channel to promote its platform. 

In the case of ABCD issued on binance chain, the incentive probably is to promote it’s issuer and blockchain platform binance. The Bit Sika platform will issue the coin to be used on binance chain and its platform. 

Moreover, according to reports, nine cryptocurrency exchanges including Bitmama and Busha will be adopting the claimed First Africans Stablecoin pegged to naira. 

The creation of these type of coins is on increase already with many companies issuing same on its platform. It’s mostly on public blockchains like ethereum or private blockchains otherwise known as distributed ledger technologies. 

Now, you are sure that you have a good knowledge of what is stablecoin and how it actually works. 

Feel free to follow us on twitter @diutocoinnews.

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By Tony Chimdiuto

Content Developer | Blogger | SEO Manager | Web Administrator | Web Designer | Copyrighter | Journalist|

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