May 27, 2022

Stablecoins: What They Are & Why They’re Better

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First and foremost, stablecoins are the safest bet when diving into the DeFi market and we’re going to tell you why. Most people have heard that the DeFi crypto market is the wild west of finance, and while this comparison isn’t entirely wrong, you can consider stablecoins your safe bet, or continuing with the wild west comparison, your ace-in-the-hole.

The 3 Types of Stablecoins

To make it even easier, rather than searching through the 1583 cryptocurrencies listed on Coinmarketcap to figure out which are stablecoins and then go even further to see what type of coin they are, we’re going to break it down for you right here so you can research properly on your own for the right types of coins you want to invest in, or barring that figure out how to go about getting into the DeFi market at all, but we’ll get to that later.

  1. The Fiat Collateralized Stablecoin

These stablecoins are the ones you’re most likely going to come across. What makes these stablecoins the most widely known is that they are backed by fiat or legal tenders such as the Euro, GBP (British pound), or USD (the U.S. dollar). They are backed 1 to 1 vs. their supporting currency. So 1 stablecoin is the equivalent of having 1 tangible dollar, pound, or whatever fiat currency it is backed by. They are the simplest and most secure type of cryptocurrency because of this.

These could be the coins for any beginner to start getting into the crypto market. They are the most stable and simplest of all stablecoin categories. Furthermore, things like what happened with Luna and Terra, the death spiral that tanked both, are extremely unlikely to occur because of their tangible backing.

  1. The Crypto-Backed Stablecoin

While this may seem odd, crypto that is backed by another form of cryptocurrency are stablecoins and is actually a better segway into the decentralized market compared to straight-up fiat-collateralized stablecoins. Moreover, because those stablecoins are over-collateralized (meaning stablecoins circulating on the market are backed by crypto collateral that is worth more than the value circulating), you are not only participating in the DeFi market, but you’re doing it with safer assets.

To take it a little further, this is what we mean by an over-collateralized, crypto-backed stablecoin. An example of over-collateralization would be depositing $1000 worth of Ether in order to obtain $500 worth of stablecoin. In this case, the stablecoin you obtain is collateralized by 200% of its value in volatile crypto or inversely you can only mint 50% of the value of the collateral in stablecoin. This means that your collateral value can withstand a market price drop of up to 25% if the liquidation threshold were at 66% since the collateral would be now worth $750 and stablecoin would still be worth $500. This over-collateralization is key to creating a stablecoin backed by volatile assets making the stability mechanism more robust to price volatility.

The most important aspect of these coins is their decentralization, however. Crypto-backed stablecoins could help processes become more trustless (meaning you don’t have to trust a third party with handling your funds. I.E: a bank, person, or any third-party intermediary) with improved security, better transparency, and lacking capital efficiency due to over-collateralization. Without any single entity in control of your funds, you have the benefit of decentralization.

  1. Algorithmic Stablecoins

The last type of stablecoin, the algorithmic sort are non-collateralized, i.e. they have no fiat backing. So, I bet you're asking yourself how can these coins be considered stablecoins, then? These coins actually follow a mathematical algorithm to control their overall supply. Most of these stablecoins (algorithmic ones), use a variation of seigniorage shares with arbitrage opportunities. As demand goes up, more coins are produced to maintain the coin's value at its target price whether pegged to $1 or another value... If the opposite were to happen, as-in demand goes down, these coins stop being traded as much, then the coins on the market are purchased and taken out of circulation through burning/destruction to maintain the stablecoin value close to the peg. This whole process can be done automatically by the smart contracts or it can be through the participation of users through incentivization via arbitrage or seigniorage. UST, BasisCash, AMPL USDD, and USDN are algo-stablecoins. FRAX and FEI are algo-stablecoins with reserves. Purely algo-stablecoins have the highest risk of a death spiral which can be seen in the last 2 red rectangles on the top-left of the image below.

In short, algo-stablecoins are directly influenced by the supply and demand market, adding in rational market participants involved aiming to profit from arbitrage or seigniorage opportunities. It’s also important to note that algorithmic stablecoins offer the highest level of decentralized or independent governing of your own assets. With these coins though, you need to be aware of the risk. Due to the fact that there is no collateral involved with algo-stablecoins for liquidity, if there is a market crash, you can lose all your money.

Investing With Coinchange: The Way To DeFi  

First, we give all our clients $50 for signing up with us and simply investing. It’s a free 50$ right into your Earn Account so you can see the yield you’ll earn. To earn more and take advantage of the 50$ you just need to invest $500USD or the equivalent thereof and keep it invested for 30 days, so take your first steps into the market with us right here.

Why are we so confident with our platform and stablecoins? Well, to put your minds at ease, we only have the first 2 of the 3 stablecoins mentioned above that our users can invest with. We prefer offering secure returns without the chance of our users losing all their money because of stablecoins not being backed.

Our main strategy when it comes to all our different approaches is to provide aggregated liquidity provisioning and yield farming functionalities across different protocols and blockchain ecosystems. A large part of our methodology has been set up via automated algorithms to 

  1. Remove the chance of human error affecting any monetary transactions

  1. Put in place meticulously calculated algorithms that will provide returns no matter the state of the market

We are able to provide yield regardless of the value of the individual coins like BTC thanks to techniques enhancing DeFi revenue generated.  We tightly monitor protocols we have hand-selected, and run through numerous checks to ensure they will be the most profitable for our users and the most secure.

We do not only focus on stablecoin protocols to earn our customers' yield either, if you have Ethereum or Bitcoin, we can also use those tokens within our strategies to earn your rewards on those as well. This is why we say Coinchange is the way to DeFi for everyone. Whether your a crypto native, well versed in everything the market has to offer, or you’re simply trying to see if you want to get started in crypto, we’re the safest bet to earning rewards with your investments, and you can be sure, as time goes on, we’re only going to be adding more techniques and strategy amongst what we have in order to generate even more yield on the market.

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