How Do Synthetic Stablecoins Work?

General, Stablecoins - August 25, 2020

Video Overview

Stablecoins are cryptocurrencies with a stable price. Most stablecoins’ price is equal to the dollar. This means that 1 stablecoin = $1.

Many cryptocurrency companies are building their own stablecoins. These are called synthetic stablecoins. Examples of such companies are Synthetix, Gemini, Universal Market Access (UMA), and more.

These stablecoins are synthetic. This means that the price of this is derived from the price of the dollar. These companies undertake the function of custody and representation. Meaning they custody the dollar either partially or in full, and represent it. Users of this synthetic stablecoin can rely on its stability.

Both stablecoins and the dollar are equal in price. But their main benefit is that they are programmable. This means that we can do so much with the stablecoin on blockchain and with DeFi. For starters, you can send it anywhere with very little fees. Beyond that, you can use smart contracts to have auto-executing stablecoin payments.

Synthetic stablecoins are companies creating their own currencies. But these currencies represent the same currency – the dollar. However, these currrencies run on different networks, the company’s network. The GUSD runs on the Gemini network. DAI runs on the MakerDAO network, which is on Ethereum. USDC is run by Circle, and Tezos USD is run by the Tezos Foundation.

Stablecoins are the first layer of synthetic assets. With custody and representation, any asset can have a synthetic form. Like stock prices, or commodity values, or even market indexes. Each of these assets has a number and it changes, this can be tracked via a token. These tokens can be traded, held, or even used as payment.

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