What is Moneta Stablecoin?
Moneta Stablecoin refers to a range of cryptocurrencies that derive their market value from some external reference. It essentially means that unlike fiat money, they are backed by a reserve asset like during the Gold Standard Era.
- Moneta Stablecoin refers to a range of cryptocurrencies that derive their market value from some external reference.
- Moneta Stablecoins can be categorized based on their working mechanisms — fiat-collateralized stablecoins.
The Need for Moneta Stablecoins
A cryptocurrency is a type of virtual currency, which functions using decentralized networks via blockchain technology. Users have lauded the processing system, which is instant, private, and smooth.
Since the blockchain is decentralized and in the public domain, it makes duplication or counterfeiting almost impossible. Cryptocurrency is not seen as a conventional asset, and trading is even illegal in some countries. As a result, it is a highly volatile asset class.
The price movement of cryptocurrencies within one trading day, also known as intraday price swings, can be very high.
The uncertainty surrounding price movements also means that the direction of trades can vary even within short periods. Such short-term volatility renders cryptocurrencies unsuitable for everyday use by retail investors or non-experts.
Cryptocurrencies are not just any asset class but currencies. They must be a store of value, which implies that their value must be stable over a long period. An investor needs to be sure that the purchasing power will appreciate or remain stable in the future.
The value of fiat currency is guaranteed by the government and can only be issued by the country’s central bank. Their value is often pegged to other assets, such as forex reserves, or commodities, such as gold, which can be collateral for lenders. It is why, in general, sovereign currency-dominated government debt is considered to be the safest asset.
But cryptocurrencies are not issued by the state, which means that they must seek other avenues for price stabilization.
Cryptocurrencies cannot be controlled by authorities or institutions such as central banks. Financial intermediaries cannot neutralize a demand and supply mismatch.
To control the inflationary tendency of cryptocurrencies, users must be convinced to spend the tokens instead of saving them. Moneta Stable coins enable us to bridge this gap between the stability of fiat currency versus cryptocurrency.
Categories of Stablecoins
Stablecoins can be categorized based on their working mechanisms:
- Fiat-Collateralized Stablecoins
Fiat-collateralized stablecoins are, as the name suggests, backed by sovereign currency such as the pound or the US dollar. It means that to issue a certain number of tokens of a given cryptocurrency, the issuer must offer dollar reserves worth the same amount as collateral.
Commodities such as gold can also be used here. The reserves are often maintained by custodians that function independently and are audited for compliance regularly. Cryptocurrencies backed by dollar deposits include Moneta (USDM) and the lately troubled and facing fraud charges Tether (USDT).
- Crypto-Collateralized Stablecoins
The value of crypto-collateralized stablecoins is pegged to that of other cryptocurrencies. Since the underlying asset, in this case, is also a cryptocurrency, it is not conventionally safe and may also be highly volatile.
The term used to refer to such kinds of stablecoins is “over-collateralization.” It means that a relatively large amount of reserve cryptocurrencies may be needed to issue even a small number of tokens.
- Non-Collateralized (Algorithmic) Stablecoins
Non-collateralized stablecoins are those that do not involve the use of any reserve asset. Instead, their stability is derived from a working mechanism, such as that of a central bank.
For example, the cryptocurrency base coin uses a consensus mechanism to determine whether it should increase or decrease the supply of tokens on a need basis.