To approach the world of decentralized finance, we first need a fundamental element: a token that allows us to represent a fixed value To buy, sell, provide liquidity and borrow without exposing ourselves to the classic volatility that characterizes most cryptocurrencies.
Not being able to directly transfer fiat currency to a distributed ledger can come to our rescue stablecoins: cryptocurrencies designed to maintain a stable value against a reference assetLike the US dollar or the euro. This type of token is currently one of the most used systems in DeFi activities.
There are three types: centralized (1:1 collateralized with fiat currencies), decentralized, and algorithmic.
Central stablecoins are pegged to the value of a fiat currencyand maintain a stable value thanks to the presence of reserves in the same currency or derivatives: this guarantees redemption without restrictions on quantity and time. Most used centralized stablecoins today USDT, USDC and BUSD, all three are tied to the equivalent value of one dollar unit. In this case, there is a central body that deals with the management of the underlying itself.
On the other hand, decentralized stablecoins are fixed in a treasury, often locked in DeFi and maintain stable value thanks to Collateralized Debt Positions (CDPs). One of the most prominent examples currently on the market DAI, the stablecoin of the MakerDao protocol. The total balance of this stablecoin will always be protected by an amount of multiple assets as collateral.
To avoid the risk of being harmed by the high volatility of locked assets and therefore not having sufficient leverage for each DAI unit, each CDP must be based on a margin amount that is much larger than the value of all DAI units produced.. To give you a practical example, it will be necessary to block at least $1,500 in Ether to generate 1,000 new DAI units; furthermore, much attention should be paid to the CDP’s position to avoid the risk of forced liquidation.
Finally, The algorithmic stablecoins autonomously keep the value of the cryptocurrency stable without the need for physical reserves in fiat or crypto.. In this case, the management of the latch is entrusted to an algorithm that guarantees the balance between destruction and production (burn And mint) the new stablecoin circulating at the expense of another circulating coin, in this case volatile. There is no real underlying reserve for such stablecoins.this is them potentially risky assets: We recall the situation of UST and LUNA, whose mechanism could not hold the anchor in dollar terms due to the difficult market situation mixed with manipulation.
Other experiments that led to the emergence of hybrids, such as “fractional-algorithmic” stablecoins, were not lacking: an example is FRAX, which combines the technology of decentralized stablecoins with algorithmic ones.
In any case, holding stablecoins is not always synonymous with a guarantee: there have been moments of anxiety that put the stability of even the largest and most proven centralized tokens to the test.
Alberto Cuculachi is an entrepreneur, popularizer and university professor in Marketing and Business Development. He has been following the blockchain world since 2013 and founded his YouTube channel DeFi Talks in 2021. It has reached more than half a million people in more than 100 different countries through its channels in the past year. Today, he is engaged in creating useful educational content and tools to make the world of crypto and DeFi accessible to all.
Alessio Vilmercati is a 22-year-old investor and DeFi enthusiast with a Business and Management degree. In 2022, he obtained his Blockchain Technology & Management certificate at the Blockchain Management School in Rome. Predominantly in the world of DeFi, Alessio devotes himself to reviewing dApps every day, looking for new opportunities every day. As an open supporter of this technology and its future application in the traditional world, DeFi Talks collaborates with the YouTube channel.
Federico Chironi is a 23-year-old trader and DeFi enthusiast with a Business Administration degree; He then chose to continue his education with a Master’s degree in Blockchain Technology and Management at the Blockchain Management School in 2021. He has been studying and investing in the blockchain world, especially in the DeFi sector, since 2020. Decentralized Finance, which will bring it in the coming years, has recently been doing outreach activities on the subject in cooperation with the YouTube channel DeFi Talks.
Luigi Travaglini is a popularizer and technical advisor in the cryptocurrency industry. He intersects with the crypto world between 2014 and 2015, then becomes passionate and never breaks himself off. Combining his academic career with a long technical study in the field of blockchain, he started to provide training and assistance services in 2018.