Educational Byte: Stablecoins Basics and Cross-Chain Uses
Not everyone is up to dealing with the high volatility associated with most cryptocurrencies. That’s why stablecoins were born. They’re cryptographic assets, as much as Bitcoin, Ether, GBYTE, and other coins of this nature, but with a stable price. Unlike their volatile counterparts, stablecoins aim to maintain a stable value by pegging their worth to an external asset (like USD) by providing proper reserves of that asset or algorithmically controlling their supply.
Stablecoins can be categorized into three main types based on their underlying mechanisms: Fiat-collateralized Stablecoins (backed by traditional money), Crypto-collateralized Stablecoins (backed by a basket of other cryptocurrencies), or Algorithmic Stablecoins (backed by their own code).
The latter type maintains its stability through algorithmic mechanisms, using smart contracts and economic incentives to control its supply and demand dynamically. Or, in other words, their system automatically mints new coins if the price rises, and destroys a part of the available supply if the opposite occurs. A limited supply increases the value.
Centralization vs Decentralization
You must know that most stablecoins are highly centralized, unlike other cryptocurrencies. Centralization refers to the concentration of control or decision-making authority within a single entity or a small group. That’s totally the case with the most popular stablecoins lately.
For example, Tether (USDT) is completely controlled by the company Tether Limited (owned by the crypto exchange Bitfinex). USD Coin is also fully controlled by the American firm Circle. These entities retain a significant level of control over the stablecoin’s operations, including its supply, collateral management, and decision-making processes. They can even freeze the stablecoins of their customers for any reason.
Algorithmic and some crypto-collateralized stablecoins, being issued on smart contracts and/or taking the value of other decentralized assets, offer a less centralized approach compared to other types of stablecoins. Therefore, they’re censorship-resistant and with fewer entrance barriers.
By relying on decentralized protocols and code rather than centralized authorities (like companies), these types of stablecoins also aim to achieve greater autonomy and community-driven governance, aligning more closely with the decentralized ethos of cryptocurrencies.
How to use popular stablecoins in Obyte?
Obyte, a decentralized platform built on a directed acyclic graph (DAG), built its own algorithmic stablecoins (bonded stablecoins). They’re designed to earn interest percentages, however they haven’t been very popular and struggled to keep the peg.
On the other hand, Obyte also provides a solution for utilizing external stablecoins through the integration of the Counterstake Bridge. This user-friendly platform serves as a connection (cross–chain bridge) between the Obyte network and other cryptocurrency platforms, enabling the transfer and use of stablecoins within the Obyte ecosystem — including all the DeFi functions.
Here’s how it works in simple terms: Let’s say you want to move a certain asset, like GBYTE on Obyte or ETH on Ethereum, from one ledger to another. You start by locking up the asset on the original chain and then claim an equivalent amount of that asset on the new one. When making the claim, you need to put up a stake, which is like a security deposit.
This stake is paid using the native currency of the new ledger, such as ETH on Ethereum or GBYTE on Obyte. If your claim is legitimate, you will get your stake back. However, if your claim turns out to be fraudulent or invalid, you will lose the stake.
Using the Counterstake Bridge
Using the bridge is very simple. You need two crypto wallets: an Obyte wallet and the one the stablecoin is from (Ethereum, for example). Currently, Counterstake Bridge has support for tokens on Ethereum, Polygon, and BNB Chain. On the main website, you can choose the assets you want to exchange and in which direction (import or export).
For instance, you can send any amount of USD Coin (USDC) from Ethereum to receive an equivalent USDC amount in Obyte — or vice-versa. You just insert your destination wallet address (Ethereum or Obyte, depending on the transfer direction) and click “Transfer”. A confirmation window from your wallet will pop up, and you need to accept it. Then, you just wait for your tokens to appear in the destination wallet between 10 and 30 minutes. That’s it!
Stablecoins can be used in Obyte, among other things, to protect your savings, participate in Liquidity Mining, make conditional payments, pay contracts with arbitration, and much more. Try them now!
Featured Vector Image by Freepik
Originally published at https://hackernoon.com
