Meaning of the word “currency” 

As you are introduced to the world of cryptocurrencies (FIAT, stablecoins, etc.), it is important to understand the fundamentals of money and how currency works around the world. 

Start your Crypto Journey today leanr about FIAT money and Stablecoins

Money and currency are not the same thing, at least in theory.  Money is not always something you can touch, but currency (FIAT money) is a real thing that can be used to buy things. People think of money as numbers, while coins and bills are called currency. A physical object is presented at the point of transaction. This difference will interest only some people, so it will not be the focus of this blog post. However, for the sake of this blog post, we will consider money and currency to be the same term.

Money is a recognised medium of exchange made with the intention of creating a platform for people to buy or sell their products and services easily. In former centuries, the system used to exchange values was the barter system. A crop farmer may need a tuber of yam; this means he will take a portion of his crop products in exchange for yam from someone who needs the crop products and is willing to give out a tuber of yam. 

The batter system failed to achieve an effective means of exchange because it couldn’t effectively unify the desires of the exchangers. Most exchangers will not find the person who desires their product or service and is willing to provide their exact desire for exchange. This inconsistency led to the invention of currencies, which have evolved over several decades until now. 

What is FIAT money?

What is FIAT money

Photo Credit – 8photo by Freepik

The term ‘FIAT Money’ sounds very technical; however, there is no need to panic; it just refers to a form of currency the government issues. Every day we buy, sell, or do both with FIAT money, like the USD, Pounds, Euros, and many others. The drawback of FIAT currency is that with it, the central bank has so much power and control over the economy; this is due to the fact that they can control the extent to which FIAT money can be produced. This is what makes FIAT currency different from cryptocurrency.

What is cryptocurrency?

Cryptocurrency, unlike the FIAT money that the central bank issues, is a digital currency. These currencies, as opposed to the common currency (FIAT Money), are not tangible, and the government does not have direct control over them. It’s operation is Internet-based and is not reliant on the authority of the central bank or government agency to regulate it. 

The decentralised nature of crypto-currency

Cryptocurrencies use blockchain technology, an open-source software technology that is operated and facilitated by a vast number of users; these decisions are plainly shown to every user. Because a cryptocurrency’s volatility (rapid change in value) depends on a large number of users, it is impossible for a single person, authority, or group of people—such as the central bank or a taxing body—to cause inflation. 

Using cryptography for crypto-currency security

Cryptocurrency is coined from the two words  ‘cryptography’ and ‘currency’.  Cryptography, which means concealed writing in simple terms, is the study of the encryption (protection) and decryption (retrieval) of information. Even though Cryptography does not limit its use to cryptocurrency, it plays a vital role in ensuring cryptographycy security. 

Cryptocurrency technology 

Prevalent types of cryptocurrencies employ the technology known as public-private key cryptography to ensure that a crypto transaction is secure and takes place directly between the parties involved. When a cryptocurrency transaction takes place, a public key is generated from the private key by a process called ‘hashing‘.

There are various reasons for employing cryptography in cryptocurrencies. However, among these many, three stand out.

  • To ensure the security of cryptocurrency transactions.
  • To regulate the creation of new units of cryptocurrency
  • To guarantee the authenticity of the sending and receiving of assets so as to avoid transacting with duplicate coins. 

Having understood the science of the security behind cryptocurrency, let’s delve in further and learn about some practical Crypto-currency

What are Stable Coins?

Cryptocurrencies whose market worth is pegged to a fiat currency, an asset, or a financial Instrument in order to guarantee the stability of their worth are called stable coins. These coins provide a more reliable exchange than a regular, volatile cryptocurrency. These coins are usually pegged to currencies like the US dollar or even a valuable commodity like gold or silver. 

In April 2021, Bitcoin started to crash until it had plunged to about fifty percent of its worth after experiencing a boom in the month of March just a year before. It rose in value from about five thousand dollars to over sixty thousand dollars in the span of one year. One would not think that a coin as renowned as Bitcoin would experience such volatility, but that’s what even the best regular cryptocurrencies can look like.   

Stablecoins will usually maintain a stable value, and from observation over many years, prominent stable coins have experienced just a little swing.

Types Stablecoins

Photo Credit – AltFi

Categories of Stablecoins

Stablecoins can be categorised into four categories depending on what their value is pegged at: 

  • FIAT-pegged stable coins These are stable coins whose value is backed by the equivalent value of traditional currencies like USD, Euro, and GPBA. FIAT currency specifically backs all FIAT-backed stablecoins. The most popular FIAT currency to use is US dollar. Examples of FIAT-backed stable coins are USD coin-Tether (USDT), DAI, and Binance USD
  • Asset- or commodity-backed stablecoins Commodity-backed stable coins are those that rely on assets like gold, silver, real estate, and other commodities to guarantee their stability. Examples are PAX Gold (PaxG) and Tether Gold (XAUT).
  • Crypto-pegged stable coins These are stable coins that take advantage of one or more cryptocurrencies for the purpose of maintaining their stability. An example of one is Wrapped Bitcoin (WBTC) 
  • Algorithmic Stable Coins These stablecoins rely on algorithms for support. In fact, this algorithm is designed to balance the market itself by releasing more coins when there is an increase in price and selling them off when the price falls, so as to cause stability in the market. An example is Ampleforth (AMPL)

The most prevalent stablecoin by market capitalization is Tether (USDT). This particular stablecoin is pegged to the US dollar at an equivalent price (one ratio one), and it is also backed by Gold assets.