AAX Academy丨Why are stablecoins important?

Stablecoins are an important part of the crypto ecosystem. Stablecoins differ from other cryptocurrencies such as Bitcoin and ETH in that their prices are stable relative to other assets. Most cryptocurrencies are prone to price fluctuations, sometimes very violent ones. This might be fine for speculators who can quickly get in and out of trading currencies for profit, but for certain use cases like needing to pay in cryptocurrencies or diversify your portfolio during times of high volatility, Price stability is crucial.

In fact, it is important to realize that no asset is absolutely stable. Whether it's gold, real estate, the U.S. dollar, or bitcoin, price discovery is an ongoing process. However, unlike cryptocurrencies, which are fully exposed to the dictates of the market, stablecoins are designed to absorb reasonable fluctuations while retaining a fixed value. When it comes to real-world applicability, stablecoins are more like strong currencies like the U.S. dollar, but with the advantages of cryptocurrencies.

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There are two main types of stablecoins:

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Fiat-backed stablecoin

Cryptocurrency-collateralized stablecoins

This type of stablecoin is backed by an equal amount of fiat currency, which is usually held by a central custodian. Take USD stablecoin as an example, you send 1 USD to the custodian, in return, you will get 1 unit of this stablecoin, which is equivalent to the value of 1 USD. Holders of these tokens are then guaranteed to have the option to convert their tokens back into currency at any time. This type of stablecoin includes tokens pegged to fiat currencies such as USDT (U.S. dollar), GUSD (U.S. dollar), QCAD (Canadian dollar), and EURS (euro). Other stablecoins may be pegged to different assets, such as DigiX, where one DGX coin is equal to one gram of gold.

Live | AAX joins the partner platform of the London Stock Exchange Group: Jinse Finance live report, at 18:00 on November 27th, London time, and in the early morning of the 28th, China time, at the official press conference held by the London Stock Exchange, AAX announced that it will cooperate with the London Stock Exchange The Exchange Group (LSEG) launched a formal cooperation and joined LSEG's global partner platform. The partner platform enables AAX to draw on LSEG's expertise and experience in financial markets, LSEG connects AAX to its infrastructure dedicated to processing critical transactions and high-volume data, and AAX provides direct access to LSEG's more than 300 institutional members Market access services, and further expand the European and Asian markets through LSEG's global exclusive network. Thor Chan, CEO of AAX, said that "this partnership has opened the door to the digital asset market for institutional capital, and has taken an important step." LSEG multilateral trading agency Turquoise commented on today's activities with "significant", This is an important moment as it brings digital asset markets closer to investors in traditional financial markets. LSE Group is eager to continue driving innovation in finance and technology." [2019/11/28]

Basically, these stablecoins are backed by another cryptocurrency, which makes them different from fiat-collateralized stablecoins and eliminates the need for a third party (i.e. a central custodian) to step in. Crypto-collateralized stablecoins are generally over-collateralized. This means that even if the price of the underlying cryptocurrency fluctuates, the price of the stablecoin is not affected. A good example of this type is DAI, the stablecoin created by the MakerDao project. Based on Ethereum, it is one of the most prominent stablecoins in the DeFi ecosystem, embedded in many lending protocols such as Aave and Compound.

There is also a third model for creating stablecoins, which uses smart contract programming to maintain the peg by increasing and decreasing the stablecoin supply in response to market volatility. This model is called non-mortgage model, but it is still somewhat experimental, and the current market share is still very small.

Stablecoins are an important factor driving the adoption of crypto technology. Stablecoins are seen as key to driving crypto mainstream and global acceptance, and there are already a range of use cases.

Stablecoins make it possible for cryptocurrency holders to become crypto consumers. As a form of digital currency, stablecoins are well suited as payment systems for everyday transactions and global commerce. For example, Flexa takes stablecoins seriously and has partnerships with merchants to accept stablecoins for payment. It helps reduce processing costs, reduce fraud losses, and reach entirely new customer segments. The company says 40,000 points of sale in the U.S. and Canada are already connected to the Flexa payment service, tapping into the crypto economy and all the benefits digital currencies can bring.

For crypto traders, stablecoins make it easier and cheaper to exchange between cryptocurrencies and fiat currencies. The reason for this may be to hedge risk, seeking protection in the event of extreme volatility in crypto assets. Likewise, it gives traders the ability to wait for the perfect moment to add to their positions when buying stablecoins involving crypto as an intermediary currency. This will be a completely different experience than using a direct cryptocurrency service such as a Bitcoin ATM.

As with any other asset, it's important to have stablecoins spread out across your crypto portfolio. This applies to stablecoins linked to multiple currencies, but even within the same currency system, it is recommended to hold more than one stablecoin.

For example, holding a stablecoin between USD, EUR, CAD, and JPY allows for diversification, but still exposes you to the reliability of a single stablecoin for each currency. If you only hold GUSD against the US dollar, then all your eggs are still in one basket. Instead of this, it is better to disperse your USD-backed stablecoins into GUSD, USDT, DAI, USDC and other currencies.

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