2. Interest-free loans
3. Lotto-like savings
Cryptocurrency is widely considered as being a strictly technologically advanced invention in the realm of decentralized finance. However, behind its rapid evolution from the highly volatile Bitcoin to the more reliable stablecoins being used today, great human ingenuity, drive, and creative ability have devised simple solutions to complex problems.
The most well-known cryptocurrency is Bitcoin which was widely criticized for being useless as a currency due to its high price volatility. It simply does not have the consistency needed to be a trusted and reliable currency for trade and payment. Therefore, great minds came up with another cryptocurrency that did not have the same wild fluctuations and unpredictability called stablecoins.
A stablecoin is a cryptocurrency that reduces price volatility by being pegged to a stable asset like the US dollar. This method secures the dollar as collateral. Every time one token is made, one dollar is collateralized. Therefore, the token price is always maintained at the edge of a dollar. This type of token is called a US Dollar Tether (USDT) which is a blockchain-based stablecoin that is used for trading for 1 USD and is currently the most widely used. USDT now functions as a connector between fiat currencies and crypto currencies which results in the stability and transparency that users need. In addition, there are very minimal transaction charges for users.
Another variety of stablecoin is pegged to a cryptocurrency like the Ethereum (ETH). Instead of stabilizing value by linking ETH to a legal currency, Ethereum tokens are linked to another cryptocurrency called a DAI. If someone would like to use Ethereum as collateral, they first receive a DAI, and then get Ethereum back. Just like USDT, DAI is managed to move around 1 dollar. DAI’s price stability is maintained by a system of smart contracts and is independent of banks and governments.
The journey to develop a stable cryptocurrency has not been a smooth one. An earlier version called Basis, tried to use a kind of open market operation technique that releases more tokens when its price rises, and on the other hand, recalls them when its price falls. When Basis was about to be released into the world, the U.S. Securities and Exchange Commission (SEC) signaled that the coin's fundraising approach seemed to be a security. It was a warning not to raise funds. Therefore, Basis was shut down right away.
Fortunately, the USDT has consistently maintained its popularity and serves as a key currency in the world as a stablecoin, but in the past, it was widely criticized in all quarters. There have been reports that the amount of USDT issued and the number of dollars held as collateral do not match. It was also pointed out as a weakness that the USDT was managed by a particular company.
USDT was designed to circulate on Bitcoin, but as Ethereum became widespread, the ERC-20 smart contract was launched to work on the Ethereum main net. As the number of apps running on Ethereum skyrocketed, DAI was positioned as a key currency that works on the Ethereum apps. In particular, when the Ethereum price rose after entrusting Etherium and borrowing a DAI, Collateralized Debt Positions (CDP), a business model to take out a loan or debt against said collateral, has appeared.
Since Ethereum prices do not always rise, the CDP has come up with measures in case the price declines. If someone is mortgaged Ethereum, they will receive DAI equivalent to 66 percent (i.e. 2/3) of the price. It would be nice if Ethereum's price rises, but if it falls below a certain price (i.e. below 150% of collateralization ratio), the additional DAI will be liquidated immediately.
Overall, there are two main advantages of a collateral-based stablecoin. First, this token can be used as a dollar substitute currency because the price is fixed at 1 dollar. In addition, if the collateral price rises after entrusting the collateral and buying the token, the token can be used for your business and you can expect the collateral price to rise.
Stablecoin is an innovative model of decentralized finance and a good simulator for experimenting with futuristic finance. Now, in the fledgling decentralized finance, cooler products will be designed and tested.