Learn about the concepts behind stablecoins and how they work

Tam Shams – Wednesday, May 25, 2022 08:41 PM – Cointelegraph Video Production Director Jackson Dumont provides a detailed explanation of stablecoins in the final episode of Cryptopedia. Dumont also explored and explained algorithmic stablecoins while explaining the recent incident involving the Terra Usd (UST) and why it has not been able to maintain its peg to the dollar.

Dumont defined stablecoins as “a cryptocurrency whose value is tied to an external asset such as the United States dollar (USD).” According to Dumont, stablecoins are very vital to the stablecoin industry as they provide users with the ability to store their assets without worrying about asset devaluation. This function is useful in bear markets where there are a lot of uncertainties.

Using Tether (USDT) as an example, Dumont notes that stablecoins are able to maintain their dollar pegs by having equal reserves. He explained that in order for Tether to create or mint any amount of USDT, the company must have an equal amount of USDT in its reserves.

Having these guarantees allows USDT users to be able to exchange their USDT for US dollars whenever they want. This shows that stablecoins can only be “copies” of the original. However, Dumont highlights one of the biggest differences – that stablecoins exist on the blockchain.

Regardless, Dumont also discussed the topic of algorithmic stablecoins. He explained that these stablecoins do not use any cryptocurrency or cash as their collateral. Instead, these projects use smart contracts and complex algorithms to manage circulating supply and control price. According to Dumont:

“When the price of the stablecoin deviates from the level of its peg, the tokens are burned from the circulating supply. Conversely, when the price rises above the peg, the coins are minted.”

In the case of Terra, Dumont explained that the system failed and caused a “complete market crash.” Several factors, including the minting of the Terra (LUNA), pushed the UST price below its peg, and exacerbated it as it pushed the price below its highs.

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