What is a Stablecoin?

Cryptocurrencies like Bitcoin and Ethereuem have become more mainstream and offer users access to open banking. However, cryptocurrency is notorious for being extremely volatile. It’s pretty common to see crypto jump up 10% and then drop 5 to 8% in a matter of a single day.

Unfortunately, this volatility makes it harder for people to use crypto as money every day. They can’t expect to know that they have the crypto equivalent of 10 USD if their crypto-cash is constantly moving around.

Here is where the stablecoin comes in. The stablecoin was created as a means of solving this dilemma, allowing more users to put some amount of trust into cryptocurrency valuing, giving them the ability to use this money in their daily life.

Here at Sila, we love stablecoin, and we offer it in our fintech banking SDK to send money internationally or speedily through same-day crypto transfers. Read on to learn what a stablecoin is and to learn more about the SilaUSD stablecoin!

What Makes a Stablecoin Unique?

The SilaUSD stablecoin is a patented stable coin that allows Sila users to transfer crypto money using the Sila coin over the Ethereum blockchain. So any use can transfer their currency into the equivalent of the SilaUSD and then send money on the blockchain around the world.

This is a similar process to cryptocurrency, except for how the stablecoin is kept balanced. Compared to cryptocurrency, which can be mined and traded for any value, stablecoin must be held accountable through a type of collateral system.

Stablecoins are usually backed by something else, whether it is a physical asset or a manipulating algorithm. Things like gold and forex reserve back stablecoins as a form of collateral, which means that their valuations are less likely to swing. So stablecoin can be held accountable and are less likely to be volatile because it is based on a stable asset and could risk the value of the underlying asset.

You might not think much about the necessity of stablecoins, but look at this map below, which compares the price of Bitcoin to the US dollar:

As you can see, Bitcoin has gone through many ups and downs since 2016. Compared to the US dollar, which is a fiat currency, there seem to be far fewer changes to the value of that money. While there are still incremental changes, people can still expect their dollar to mean something similar to what they owed ten years ago, especially when they compete in international markets.

Stablecoins are growing, and in early 2020, they were worth over $10 billion. Residents in countries like Brazil and Hong Kong have turned to stablecoins due to economic uncertainty in national currencies and to avoid internet censorship, respectively.

Therefore, and as we’ll get to later on, stablecoins offer much utility and actually serve as a form of accountability for major national fiat currencies. They also provide stability, security, or financial options in times of political upheaval.  

The SilaUSD Stablecoin

There are several different types of stablecoins, and usually, this depends on the type of collateral that the stablecoin uses (if it uses one at all). Common collaterals include fiat currencies, precious metals, and other cryptocurrencies.

In addition to the SilaUSD stablecoin, other common ones include:

  • Diem – Formerly known as Libra
  • Tether – Most popular and oldest
  • USD Coin – Pegged to the US Dollar
  • Dai – Ethereum stablecoin based on smart contracts

Stablecoins are typically based on an asset reserve. This is used in almost all digital stablecoin creations and the one that the SilaUSD stablecoin is based on. These stablecoins need to be based on currency exchange and reserve funds just like a financial institution.

Sila’s, for example, is pegged to the penny, and we are backed for an FDIC insured bank. So, in the worst-case scenario, the stablecoin owner should go to the relevant backing back and withdraw an asset instead of stablecoin. This is often not-allowed in standard scenarios but will be useful if the stablecoin value failed and the value needed to be redeemed.

There are other types of stablecoins—including a complex type collateralized through the backing of other cryptocurrencies. Instead of using a fiat, users would be able to redeem the requisite cryptocurrency. This type of stablecoin is commonly issued by the Collateralized Debt Positions (CDP) collateral program, which locks up the user’s cryptocurrency so that the collateral can be effectively held.

Another type of stablecoin is the algorithmic one, which is not collateralized and is instead digitally manipulated for the coin to remain stable. For example, whenever the price would increase or decrease, the appropriate amount of coins would be either burned or created for that fluctuation not to be active in the market.

Stablecoin Functionality in the Market

It’s clear based on cryptocurrencies’ growth and popularity that their uses in the everyday market have potential. But unfortunately, without stability, it can be hard to recommend the purchase or exchange of cryptocurrencies regularly.

This is where stablecoins come in. Stablecoins are backed either by valuable assets or the strategic use of cryptocurrencies, so the value of the stablecoin cannot be as affected by the market fluctuations of cryptocurrencies. Instead, stablecoins have another value assessment point to go on.

By growing collateral, stablecoins can position themselves as a new currency that lenders support. These currencies could potentially balance out and become a fiat currency over time. As stablecoins continue to grow in popularity and continue to be a stable currency, they can be used as regular or border-line fiat currencies. While the ultimate goal is to become a fiat currency, that most likely won’t happen until the currency shows a dedicated history of stability.

The Usefulness of the SilaUSD Stablecoin

With billions of dollars invested into the stablecoin market, there are many coins to choose from, and there are uses to each one. For example, the SilaUSD stablecoin is pegged to the US penny, making the volatility of SilaUSD smaller than dollar-based coins.

If your business uses Sila API, then the usefulness of the SilaUSD stablecoin is apparent. Users can log in and interact with the stablecoin market through the exchange of Sila tokens. Right now, Sila API is the only way to exchange Sila. So users can get into this market sooner before it is made public.

Additionally, the token is based on the Ethereum blockchain, which has much transferability, especially with non-fungible tokens (NFTs) hitting all-time highs in recent months. Therefore, investing in Sila is a smart choice. Not only will you have the opportunity to access the precision of SilaUSD, Ethereum, smart contracts, and NFTs, but you will also have the functionality of the Sila-powered API for your business.

Sila’s fintech solutions can operate as digital wallets and payment gateways to process electronic transfers, recurring payments for ACH transactions, single ACH debit, and ACH credit transactions, and more. All the funds are FDIC-insured, and the API also provides financial regulatory compliance.

Scale with a smart fintech solution, or implement the Sila API packages into your current financial system. With the opportunity for accessing stablecoin and providing open banking by tapping into international markets, there’s a lot that you will be able to do with Sila on your side.