This short article is meant to give a quick glance into stablecoins. Below you'll find out what a stablecoin is, why Beema uses stablecoins and the main risk associated with holding them.
Stablecoins are designed to be non-volatile digital assets pegged to a reference asset such as USD or Gold. Without stablecoins, DeFi would be very limited in its potential use-cases, as they serve the primary "currency function" in the ecosystem.
<aside> 🔑 Terra USD (UST) or United States Dollar Coin (USDC) both attempt to hold an exchange rate of 1:1 to the U.S. Dollar.
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Generally, stablecoins come in two different forms: collateralized and algorithmic. Collateralized stablecoins use a reserve asset for stability and algorithmic use a set of programmed rules and fiscal policies.
For more in depth explanation of stablecoins visit Investopedia or CoinDesk.
We currently only utilize two stablecoins: UST and USDC. UST allows us to take advantage of Anchor Protocol, the money market we use to generate industry-leading yields. USDC is issued by Circle in return for a fiat currency, such as USD, and allows us to transfer funds to and from the blockchain without worrying about volatility.
The main risk is if a stablecoin fails to hold its value against the reference asset. During critical market conditions, such as a market crash, the stability mechanism is under high stress which can lead to a “de-peg”. If UST was worth $0.95, this would mean it depegged from the U.S. Dollar by $0.05 and is no longer a 1:1 exchange. In some extreme cases, it is possible for a stablecoin to never return to peg.
There are dozens of stablecoins in the market and we have chosen a select few, specifically USDC and UST, because of their strong economic mechanics and track record of success through highly volatile market conditions. We trust the stability mechanisms of UST and USDC; we even hold the majority of company capital in them.
Email [email protected] with any questions or concerns.
Beema Finance LLC, 2070 N Broadway 4663, Walnut Creek CA, 97596