Cryptocurrency: Understand stack coins in just 3 minutes

The first stablecoin (Tether or USDT) appeared almost a decade ago. It is currently still the market leader, even represents the third largest cryptocurrency by market valuewith a value of over 80 billion USD per. May 2022.

A number of stack coins have emerged from Tether that are helping to explode their use of cryptocurrency investors. We can quote Coinbase’s USD Coin (USDC) or even Binance USD (BUSD) is offered by leading exchange Binance.

What does this stablecoin concept cover?

A stablecoin is defined as “a stable currency”, which will be linked to a physical asset by replicating the value of a financial currency, generally the US dollar. It is therefore a symbol that is not subject to the law of supply and demand like other cryptocurrencies. This indexing allows in particular to be exempted from the risk of volatility specific to the cryptocurrency market.

If they can initially be replaced on the Ethereum network, more and more infrastructure blockchains now allow them to be exchanged, such as Binance Smart Chain, Solana or even Tron.

Ranking of the most important stack coins by market value (source Coinmaketcap)

How do these stack coins work?

Stablecoins can use different mechanisms to ensure the stability of their value:

  • Stablecoins supported by a so-called “Fiat” currency. In this case, a reserve of US dollars is made to offer a guarantee. It is equally conceivable that this consideration is gold or another commodity.
  • The so-called “crypto-guaranteed” stack coins. This is to offer a counterpart with another cryptocurrency. In order to mitigate the volatility risk and absorb the fluctuations in the chosen cryptocurrency, there will be an over-guarantee that will apply. In other words, the cryptocurrency held in reserves will exceed the value of issued stack coins. As an example, ethereum was chosen to support MakerDAO’s Dai stablecoin.
  • Algorithmic stack coins rely on maintaining the value of stablecoin through computer programs that will self-manage the money supply. Smart contracts will issue tokens when the price goes up too much and buy them back when it goes down.

What are stack coins used for?

This kind of “digital currency” is perfect for transfers from one exchange to another and all current transactions thanks to its ease of use.

also read Decentralized exchange: understanding decentralized exchanges in 3 minutes

It has been one of the most popular ways to store and trade value in the cryptocurrency ecosystem. They also ensure hassle-free payment of blockchain-based assets, increase transaction speed and reduce costs.

What advantages and disadvantages can one get from stack coins

However, if these “stable currencies” offer many benefits, it is necessary to know the specific risks of their use.

  • These stack coins offer theoretically stability that helps protect against the inherent volatility of cryptocurrencies and help preserve capital.
  • They are many more easily traceable than traditional fiat currencies.
  • Whether capital gains should be declared in the case of the sale of cryptocurrencies against a fiat currency (in this case the euro), Transactions between cryptocurrencies, including stack coins, are exempt from taxationregardless of the amount.

On the side of the disadvantages, we mainly find:

  • That holding one dollar for each issued stablecoin remains very theoretical. The companies that issue these stack coins often have government debt. But also corporate bonds, or commodities as collateral.
  • that lack of decentralization This is also problematic because these cryptocurrencies are owned by private companies. There is therefore a counterparty risk if the company is in financial difficulties.
  • that future risk of strong regulation by governments and central banks to strengthen consumer protection and ensure financial stability. Also a way to combat money laundering and illegal financial transactions.

Conclusion: what future for stack coins?

Become essential in the crypto ecosystem, the strength of stablecoins is undoubtedly their affiliation with a tangible currency.

But the attraction and interest in these stack coins can evolve. In fact, central banks are massively engaged in the development of their own digital currencies linked to their fiat currency. This is especially the case with China’s e-yuan, for example.

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