Can I buy goods with Bitcoin or what is stablecoins?

The idea of Bitcoin being digital gold and a means of payment is pretty cool 💰, but come on, how are you supposed to pay in a store with a coin whose value can swing by thousands of dollars in a day? Short answer: you just don't. Nobody does that. Today, Bitcoin is the safest, most reliable, and universally understood cryptocurrency, and it's primarily bought for investment and speculation purposes.

But when it comes to actually buying goods and services, that's where stablecoins come into play 🛍️. Yes, in the vast world of cryptocurrencies, Bitcoin isn't the only game in town. Stablecoins are a type of cryptocurrency backed by real assets, like the dollar, gold, or other cryptocurrencies, which means their value is pegged to these assets. So, while Bitcoin does its rollercoaster thing 🎢, stablecoins keep things steady and predictable.

There are three main types of stablecoins playing a pivotal role in the cryptocurrency world:

The first type is fiat-collateralized stablecoins. Fiat-collateralized stablecoins essentially act as a bridge between the traditional financial world and the realm of cryptocurrency 🌉. These stablecoins are pegged to fiat currencies like the US dollar, Euro, or any other national currency on a one-to-one basis.

For example, for each USDT that Tether Limited issues into the market, they claim to keep an equivalent amount—one real US dollar—in a bank as a backup 💵. This reserve ensures that the price of one USDT stablecoin is always equivalent to one real US dollar, as long as the company backs it with actual dollars. If the market value of USDT deviates—dropping below or rising above one dollar—the company adjusts the reserve funds to realign the stablecoin's value to exactly one dollar.

The second type is crypto-collateralized stablecoins. Unlike fiat-collateralized stablecoins, these are backed by other cryptocurrencies 🌐. An example is DAI, which is primarily backed by Ethereum (ETH) among others.

How does it work at a basic level? You lock up your ETH coins in the system, and in return, new DAI coins are issued to you. The ratio is typically 1 DAI to $1.50 worth of ETH collateral. The value of DAI is designed to hover around 1 US dollar, maintained by special lending mechanisms. These mechanisms make it beneficial for users to either borrow DAI using their ETH or return DAI to the market to reclaim their ETH.

Interestingly, DAI later began to accept USDC, the second most popular fiat-collateralized stablecoin, as one of the types of collateral for issuance. This move aimed to enhance the liquidity and stability of DAI by offering additional collateral options for its users. In March 2023, a significant event occurred — USDC lost its peg to the dollar by nearly 20 cents due to the collapse of Silicon Valley Bank, where the USDC issuer had stored its reserves. This incident also impacted DAI, given that it was partially backed by USDC 🏦.

The third type is algorithmic stablecoins, representing an innovative approach to stabilizing value without direct asset backing. Instead, they use complex algorithms to automatically adjust the coin's supply on the market, aiming to maintain its value at a set level 🤖. In simple terms, software programs control the number of coins in circulation. Depending on the coin's value, they can either create new coins or burn (remove) existing coins from the system.

A vivid example of an algorithmic stablecoin is the collapse of UST from the Terra network in 2022. UST was algorithmically tied to the value of its native coin, LUNA. When the value of UST fell below one dollar, UST was burned and new LUNA coins were created, and vice versa when UST's value exceeded one dollar, LUNA coins were burned to create UST. To support the UST stablecoin, Terra began to issue many new LUNA coins, which put significant downward pressure on LUNA's price, leading to panic selling by the company, investors, and other market participants 📉. In one day, LUNA's price plummeted from $86 to $0.0001111, leading to UST's collapse to 0.

The crash of LUNA and UST was the result of a well-orchestrated attack that cost hundreds of millions of dollars. This incident highlights the importance of thoroughly understanding the mechanisms underlying cryptocurrencies ⚠️.

Using stablecoins like USDT, which is backed by the US dollar, or DAI, which is supported by a mix of cryptocurrencies, offers the convenience of low fees and stable prices. Imagine paying a mere 1 USDT fee for transactions—it's a significant advantage for online shopping 🛒, combining crypto innovation with the reliability of traditional cash.

While the story of algorithmic stablecoins like UST serves as a cautionary tale, it also showcases the creative spirit propelling the world of crypto forward 🚀.

So, next time you're ready to shop online, consider using stablecoins for an efficient and cost-effective experience 💳.