Those who track the blockchain industry trends, including startups, crypto entrepreneurs, investors, and traders, must have heard about Stablecoins. Stablecoins are nothing else than cryptocurrencies for those who are not much familiar with the concept. Does that make it the same as bitcoin or altcoins? That’s the thing that makes it all interesting, that’s for sure! Check how bitcoin affects if you wish to start trading bitcoin.
While you see limitless potential in cryptocurrencies like bitcoin, the critical side of you can’t ignore the problem of volatility. Because of Bitcoin’s volatile value, it gives you a very narrow window to say, “I can afford this”. There’s no guarantee that it will hold its value; one day, you might be able to buy a car, and the next, you might only be able to buy two pizzas. People are hesitant to adopt cryptocurrencies because of the dramatic volatility that fluctuates daily.
What is a stablecoin?
Stablecoins have a stable value that doesn’t fluctuate much, as the name suggests. This is not that it is volatile, but that it is just as stable as fiat currencies or other assets, such as gold and precious metals. Stable coins offer the benefits of cryptocurrencies while maintaining the stability of fiat currencies. Tokens whose value is tied to the value of a national currency to counteract volatility.
Fiat currency is mimicked by stablecoins, which are digital forms of money. The dollar and euro are pegged to gold or another asset, such as cryptocurrencies, making them stable. The rate of stablecoins is very stable as opposed to that of conventional cryptocurrencies.
A stable coin can be a convenient and efficient means of exchange and saving due to its high stability. In countries with unstable economies and payments of salaries and pensions, they are seen as an excellent alternative to fiat money. We should investigate stablecoins and see what they have to offer.
How are StableCoins classified?
Due to their backing by a reserve asset, stable coins have enduring value. A stable coin can be one of four types depending on what kind of reserve asset backs its value:
The Fiat currency
Defining a stable coin as one backed by fiat currency is not simple. First, they have a fixed value of 1:1. Tether, for example, is a stable coin that is linked 1:1 to the US dollar in value. As collateral, fiat currency is deposited for the stablecoin to exist. To determine that a token is always collateralized, a financial custodian and regular audits are required.
Unlike collateralized stablecoins, non-collateralized stablecoins utilize a Seigniorage Shares model. This is because money’s value varies with its printing costs. This is known as seigniorage. The algorithm controls the supply volume for these coins, which changes it according to the price. If the price of stable coins drops below a pegged currency, they can be sold, and if the price rises, they can be supplied.
Stable coins backed by cryptocurrencies function similarly to those supported by fiat. Rather than using fiat currency as collateral, it uses cryptocurrency. For example, Ethereum can serve as collateral for a cryptocurrency-backed stablecoin. Security pledges are used to mitigate the volatility of cryptocurrencies. In contrast to other stablecoins, the stablecoin will not be backed by crypto collateral 1:1.
Stablecoins backed by commodities like real estate, or precious metals are referred to as commodity-collateralized stable coins. Gold is the most common of all the commodities that stablecoins can collateralize—having a tangible asset such as a commodity-backed coin has real value.
Commodities such as these can appreciate over time, which increases the appeal of using and storing these coins. Investing in precious metals and real estate worldwide is possible with commodity-backed stable coins. Investors from the wealthy class are typically the only ones to invest in such assets. Stablecoins provide investors from all walks of life the opportunity to invest in such assets.
Stablecoins were initially used by cryptocurrency holders to protect their assets in a market crash. Stablecoins could be created if Bitcoins became cheaper. A Bitcoin would need to be converted into a traditional currency without stablecoins.
New forms of virtual currency provide transparency, immutability, fast transaction, minimal fees, and security.