Holding stablecoins has always had its risks due to their supply being controlled by a single centralized entity. Effectively, if you own a stablecoin, you trust the organization governing it to keep its value pegged to the underlying fiat currency such as USD or EUR.
In this article, let’s take a closer look at what stablecoins are and why SameUSD by Samecoin ecosystem will improve upon the previous generation of stablecoins
What are stablecoins?
Stablecoin is a type of cryptocurrency that has value pegged to another cryptocurrency, fiat currency, or even a commodity such as gold. The most popular stablecoin known today is Tether (USDT), as it has a market capitalization of almost $50 billion and ranks in 4th place by size of total market cap.
Stablecoins allow investors and traders to keep their money on exchanges without the need to be exposed to market price risks. Transferring stablecoins from one wallet to another is cheap, fast, and reliable. However, there are some risks associated with stablecoins.
What are the main risks of holding stablecoins?
The main risks that arise from owning any stablecoin come from its value being pegged to an underlying asset, such as USD. In case this peg fails, your money could quickly lose its value without you even expecting it. Additionally, trading of a particular stablecoin is not guaranteed as most of them are controlled by a single governing body.
Risk of stablecoin losing its peg to fiat
As mentioned, the main risk for any stablecoin is its failure to sustain its value at a specific price point. For example, USD-based stablecoins are pegged 1:1 to the United States Dollar. Therefore, if sudden demand or supply spike for a particular stablecoin arises, there is a good chance of at least a short-term price movement from the ideal 1:1 peg.
Distribution and creation controlled by a single entity
An additional risk factor is the fact that a single entity controls most stablecoins. For example, the most popular stablecoin Tether (USDT) is issued by Tether Limited. This fact indicates that investors and traders who hold USDT effectively place their trust in the governing body of Tether to ensure each coin is backed by actual fiat money. As history shows, there have been cases where this was not the truth.
Stablecoin losing its convertibility on exchanges
As stablecoins are bought and sold on exchanges, they must remain supported on them. There is no guarantee that Tethers are exchangeable for real money; Tether holders have to trust the exchange to do this job and continue supporting any particular stablecoin in the future.
How can Samecoin minimize the risk of holding stablecoins?
Samecoin and its group of stablecoins such as SameUSD and SameEUR look to solve these issues to increase trust for the overall stablecoin ecosystem. Samecoin and its family of stablecoins aim to raise awareness that cryptocurrencies are indeed currencies and not assets that are only good for investment.
Decentralization of control: supply and governance
Samecoin aims to decentralize the way stablecoins are issued as its distribution is programmed in a set of Decentralized Finance smart contracts. The Samecoin protocol automatically mints new SameUSD whenever there is demand for it in return for collateral.
After purchasing and staking SameUSD, owners can receive rewards as Samecoin and use it to participate in the Samecoin protocol voting mechanism. Additionally, with SameID, your stablecoins are kept in a secure wallet, with every login verified on the blockchain. This fact ensures you are, in fact, in control over your stablecoin.
Samecoin is pegged to a basket of other stablecoins
As mentioned, one of the main risks with stablecoins is their inability to maintain a peg to a specific asset. Samecoin reduces this risk to a minimum as a basket of other stablecoins is used to sustain its value. Therefore, if one of the stablecoins in the basket starts to become mispriced, the rest of the stablecoins still ensure price stability.
Overall, Samecoin looks to solve the main issues that most stablecoins currently have. As mentioned, Samecoin and its stablecoin SameUSD is governed in a decentralized way while being pegged to a basket of other stablecoins. Governance over SameUSD is ensured by the holders of Samecoin that can vote and receive rewards for staking their coins.