I saw this post and having a hard time figuring out what it is or how it works. How does it differ from other forms of crypto?
https://financialpost.com/fp-finance/cryptocurrency/what-you-need-to-know-about-the-rout-that-just-wiped-200-billion-off-the-cryptocurrency-market-in-one-day
In: 5
In essence, a cryptocurrency designed so that is value is pegged to that of some other value, such as that of a US dollar.
This peg is maintained by various favors, such as code that automatically issues/burns a related token (I’m the case of Terra) or is backed by the issuer ‘s reserves.
A stable coin is a crypto coin that is designed to always have the same value. They are stable. For example, Luna, which is the stable coin that just crashed, was designed to always be worth 1$ USD. Lets say you wanna sell XCoin and Buy YCoin. People might not being selling X for Y so you need an intermediary that you can both agree has value. Stable Coins are supposed to be that intermediary. This means its very important that they maintain value, if they aren’t stable then they are grounds for speculation and lose all of their utility. I should note this isn’t the only use of a stable coin, but you get the idea. Its important to have stable assets everyone can agree has the same value.
There are two main ways of creating a stable coin. The first and probably the best way is to just back your stable coin 1 to 1 and guarantee it forever. For every 1 dollar of Stable Coin W there exist 1 dollar in a vault somewhere that i can exchange it for guaranteed. This has problems though. Mainly it means exchanges need to have literally billions of dollars sitting around waiting to be exchanged just incase someone wants to take money out. If not they risk not being able to guarantee it which could cause a run. Basically everyone gets scared and tries to exchange all their money held in stable coin because they hear it might crash. At which point it will definitely crash because everyone’s selling and no body is buying.
The second way is to create something called an algorithmic stable coin. The basic idea is that its backed by nothing just like fiat, but using automated bots and some fancy economic tricks you can keep the price at 1 dollar by having the bots buy, sell, create or destroy coins whenever the price falls or rises past the amount its supposed to be at. The problem is that it doesn’t really solve the underlying issue. If the price starts dropping and everyone sells because they think its going into the toilet bots buying up the coin isn’t going to make people any more confident in the project. In fact more people are gonna start selling because there are things to sell to.
Luna is an algorithmic coin and we are witnessing its death. There where flaws in its set up that some people started to exploit it. This drove confidence in the coin down at which point its just died.
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