What are Stablecoins? Why are they important?

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The craze for cryptocurrencies is growing, and with each passing day, new cryptocurrencies enter an already crowded market. Many of us are familiar with well-known currencies such as Bitcoin and Etherium, but few are aware of stablecoins. We’ve seen how much a cryptocurrency can be worth and how quickly it can change, making people hesitant to conduct transactions with their coins. In this article, we will look at what stablecoins are and what role they play in the cryptocurrency market.

What are Stablecoins?

Stablecoin is a type of cryptocurrency that is more stable than any other crypto coin because it is not mined like other coins and is instead backed by assets, which means that these coins are not as volatile as Bitcoins or Dogecoin. Stablecoin is linked to another type of asset that is far more stable and bases its value on a lot more secure commodity. These coins are tightly tied to fiat currencies like as the USD, or they can be linked to a far more stable asset such as gold, silver, or cash.

Types of Stablecoins:

Stablecoin was first introduced in 2014 AD in the form of BitUSD and after that numerous other stablecoins have come into the existence.

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As the name implies, stablecoin has a consistent value. BitUSD, USDT, and many other stablecoins are supported by collateral structures, and there are four types of stablecoins based on collateral structures.

types of stablecoins
Source: Televisory

Fiat-Collateralized Stablecoins:

Fiat money is money issued by the government that is not backed by a physical commodity, such as precious metals, but rather by the government that issued it. The value of fiat money is determined by the interaction of producers and consumers and the integrity of the licensing administration, rather than just by the price of the underlying product. As a result, this stablecoin is collateralized by fiat currencies such as the Euro or USD. Fiat collateralized stablecoins are the most basic stablecoins, with a 1:1 ratio to fiat currencies, indicating that one stablecoin is worth one USD or one Euro.

Crypto-backed Stablecoins:

The value of the crypto-backed stablecoin is tethered to other cryptocurrencies, which are more volatile in value due to the underlying asset being a cryptocurrency. Because they may be issued through automated smart contracts, cryptocurrency-backed stablecoins are significantly more decentralized than fiat-backed stablecoins. More decentralized meaning that they will not be owned by a single entity or centralized authority.

Commodity-backed Stablecoins:

You might have guessed something about it by reading the name of commodity-backed stablecoins. As the name suggests, this stablecoin is backed by some sort of interchangeable assets such as precious metals, oil, or real estate. Some of the examples of commodity-backed Stablecoins are Digix Gold and DGX. For more information, you can click here.

Algorithmic Stablecoins:

These are noncollateralized coins which means that it is not pegged to any reserve asset but rely more on extremely complex algorithms. Algorithms are used to keep the price of coins stable. The algorithmic stablecoin act as the true federal reserve, preserving its currency’s market peg, and sometimes Algorithmic stablecoin is known for losing its pegs due to unforeseen occurrences when marketing volatility spikes due to a lack of over-collateralization.

What is the use of Stablecoins?

As we all know cryptocurrencies are digital currency and are not controlled by any institution but works on a decentralized concept. Their values are so unpredictable as we have seen from the situation of Bitcoin. In 2020 Bitcoin was worth around only 4000 USD but its price peaked up to 65K USD within a month. This makes the cryptocurrency market highly volatile and leads to a loss of money.

stablecoins
Fig: Bitcoin

You do not want to be the guy that bought 2 boxes of pizza for ten thousand bitcoins. The Crypto market is highly volatile and unpredictable so you do not want to bear a loss when you exchange your digital currency. So to solve this problem, people came up with the idea of stablecoins. These coins are mostly used in process of exchanging your digital currencies. let’s take an example, Imagine a situation where you bought a bitcoin at the current price but later you found that the value of the bitcoin is decreased immensely.

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What would your circumstance be? You will lose your money, and you will be mentally disturbed as a result of this tragedy. You can now use stablecoin to protect yourself against this. You can trade your bitcoins for stablecoins, thus even if the price of bitcoin falls, you won’t be affected because the stablecoin value will remain constant. Consider stablecoin to be a solution that addresses one of the major issues with many established digital currencies: their excessive volatility makes it difficult, if not impossible, to use them for real-world transactions.

popular stablecoins
Fig: Types of stablecoin

Some of the most popular stablecoins are Binance USD (BUSD), Tether (USDT), USD Coin (USDC), TerraUSD (UST), and Dai (DAI). 

Hope you all understand about stablecoins and their types. These have been significant input in the crypto market as it has played a crucial role in balancing and bringing stability to the crypto market. Make your crypto exchange more stable and risk-free with stablecoin.

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