What is a Stablecoin? This is a question that is often asked by newcomers to the cryptocurrency space. In this article, I will explain what a stablecoin is, and what are its different types.
I will also explain how their value is derived, the different risks that come with using them, and the benefits of using them.
With the increasing popularity of cryptocurrency, stability is becoming a necessity. This is where stablecoins come in.
Knowing Stablecoin for Beginners
Stablecoins are digital assets. They are similar to Bitcoin and Ethereum. They get their value from stable assets such as currencies or physical commodities like Gold.
A stablecoin value is fixed to another asset. For example, stablecoins cryptocurrencies are based on the U.S. dollar.
This means that the value of the U.S. dollar is linked directly to the value of the stablecoin.
When you buy or sell the stablecoin, the price changes. However, due to the price being linked to the U.S. dollar, the value of the stablecoin is also very stable.
They are a kind of cryptocurrency that is designed to resist wild fluctuations in prices.
If you have been wondering what the difference is between a stablecoin, a cryptocurrency, and a digital asset, then you are in the right place!
A stablecoin is a cryptocurrency that has a fixed target price that is designed to be more stable than other cryptocurrencies.
There are many stablecoins that are designed to be pegged to a state-sponsored currency like the USD or the GBP.
This means the stablecoin will always be worth a certain amount of the target currency.
One of its benefits is that it can be used at any time, not just during regular banking hours.
This means that it can be used in day-to-day transactions. It can also be used as a more stable currency on exchanges.
Types of Stablecoins
Stablecoins List
- Collateralized Stablecoins.
- USDC.
- Tether (USDT).
- Algorithmic Stablecoins.
- TerraUSD (UST)
- The Binance USD.
Collateralized Stablecoin
In an increasingly globalized world, the need for a stable currency has never been more important.
Bitcoin is the worldβs first and most popular cryptocurrency, but its extreme volatility has made it difficult to use as a day-to-day currency.
To make cryptocurrency more practical, digital tokens are being created that can maintain a stable value. One such token is the collateralized stablecoin.
A collateralized stablecoin maintains a pool of collateral to support the coinβs value.
Suppose the stakeholder of it wishes to cash out their tokens, an equal amount of the collateralizing assets is taken from the reserves.
It is a cryptocurrency that is backed by an asset and has a price that is stable against the U.S. dollar.
In the case of USDC, the collateral is U.S. dollar deposits with the U.S. dollar stablecoin issuer. In the case of Bitcoin, the collateral is worth $5 billion in Bitcoins.
USDC
The world is changing. More and more people are moving from fiat currency to cryptocurrencies.
The USDC stablecoin is backed by the US dollar. It is similar to USDT, but it has a few key differences.
The USDC is launched by CENTRE, a collaboration between Circle and Coinbase.
USDC coin is useful to send and receive transactions and other cryptocurrency transactions on the Ethereum blockchain.
USDC was launched in 2018 and at the time of writing this article, it has a total market capitalization of about $44 billion.
Tether (USDT).
There are many stablecoins out there, but the most prominent and oldest is Tether (USDT).
It has a market cap of $66.9 billion and is currently the third biggest cryptocurrency, behind Bitcoin and Ethereum (ETH).
However, it has been besieged by doubt about the reliability of its reserves for years.
USDT is the most widely traded cryptocurrency on Bitfinex, with over $4.4 billion exchanged daily.
Stablecoins have been praised by many crypto enthusiasts as a solution to the volatility of cryptocurrencies.
Its stability is achieved by tying it to a reserve of fiat or near-fiat currency, which prevents the asset from losing value.
In the case of USDT, the ratio of the total supply and the amount of cash backing the token is shown in the weekly and monthly audits that are published by Tether.
Algorithmic Stablecoin
The price of the cryptocurrency can be volatile and unpredictable, particularly when regulated markets are involved.
With this in mind, cryptocurrencies are usually exchanged for US dollars, Euros, or other stable currencies.
However, this is not always the best solution for all cryptocurrencies, as the value of these cryptocurrencies can be volatile and change quickly. This is where algorithmic stablecoins come in.
Algorithmic stablecoins are coins that maintain their price peg via algorithms that control the supply of the token.
In other words, the supply of it is controlled by a programmed set of rules that makes it impossible to manipulate.
TerraUSD (UST)
TerraUSD (UST) is the biggest algorithmic stablecoin. It reached a market cap of more than $18.7 billion at its peak.
Terra is a new cryptocurrency that is based on the Litecoin blockchain and the Mimblewimble protocol. Terra is designed to be a stablecoin.
The value of 1 Terra USD is pegged at 1 USD via the minting and burning of a sister coin, Luna.
This is a novel model that is not used by any other cryptocurrency.
The Terra cryptocurrency is designed to be used to purchase goods and services on the Terra.co platform.
Terra was created in order to reduce the volatility of the cryptocurrency market and is responsible for the creation of the Terra USD.
The Binance USD
The Binance USD, or BUSD, is the first fiat-collateralized stablecoin on the market.
The coin is backed by fiat currency (US dollars) in a fund that is managed by Paxos, a leader in the stablecoin space.
This partnership will give Binance users the ability to trade BUSD on the Binance DEX.
Binance USD is pegged 1:1 to the US dollar, but is of course still a cryptocurrency and can be traded on the Binance exchange.
The Binance USD is available via the Binance Launchpad, the platform used to launch the Binance USD.
BUSD minimizes the volatility risks that are typically associated with cryptocurrencies.
It was founded to improve the decentralized financial ecosystem with a frictionless global network that allows digital assets to be transferred and exchanged freely.
Paxos Standard Token, or PAX, is a new stablecoin designed to make it easier for businesses and individuals to transact with cryptocurrencies.
PAX was created by Paxos, a company that is primarily focused on the crypto market.
How Are Stablecoin Used?
Stablecoins are digital currencies that offer the benefits of cryptocurrency, namely instant transfers and low fees, without the drawback of volatility.
That means investors can hold them without worrying about the cryptocurrency going up and down in price.
This idea was born out of the idea that cryptocurrency is the future of money, and it will be used more and more in the future.
There are many cryptocurrencies, but theyβre also becoming more and more volatile.
One day, a person may be doing very well with a cryptocurrency, but the next day, it might be tanking.
With stablecoins, you can hold onto your cryptocurrency without worrying about the price tanking.
When it comes to international bank transfers, the answer is actually quite simple.
It may just be more complicated to understand why International bank transfers are a prime example of one use case.
Rather the fact, this would require foreign exchange (FX) conversions with multiple banks and intermediaries.
With the help of the internet, people can make international financial transactions in a matter of hours, which is something that was not possible before.
How does Stablecoin Make Money?
- Charging Fees.
- Lending.
- Investing.
- Interest.
Similar to traditional banks centralized stablecoins, like USDT (Tether) and USDC, make money through lending and investing.
This is done through fractional reserve banking, where only a fraction of deposits is backed by physical cash on hand that can be withdrawn by investors.
The first-way stablecoin issuers make money is through the straightforward charging of fees.
Its issuers use a variety of methods to make money. Some, like fiat money issuers, charge redemption fees and issuance fees.
Others, like crypto-credit issuers, charge interest. It depends on the type of Stablecoins. The centralization of a reserve creates the desire for it to make money.
This, in turn, leads to the controversy of transparency of reserves. Centralized stablecoins (a.k.a. cryptocurrencies issued by a central bank) help central banks (C.B) to enter the market with a new asset class: investments in higher-yielding asset classes.
These revenue modes vary from protocol to protocol, but they all allow the stablecoin to earn interest while also providing new forms of governance.
Decentralized stablecoins range from selling governance tokens to locking up funds into smart contracts.
These revenue modes vary from protocol to protocol, but they all allow the stablecoin to earn interest while also providing new forms of governance.
What are the Risks of Stablecoin?
- Security.
- Counterparty risk.
- Reserve risk.
- Lack of confidence.
- Algorithms
Security
One of the most common hacks of cryptocurrency is the security of your wallet.
If hackers can get access to your wallet, they can steal your cryptocurrency and even your money.
Counterparty Risk
The craze of cryptocurrency has become so bank-like that it can be difficult to distinguish between what is real and what is fake.
With the increase in cryptocurrency contests and scams, it is important to understand what goes into the process of creating a cryptocurrency.
Reserve Risk
Having a stablecoin is a great way for an individual or company to access the benefits of cryptocurrencies without having to worry about the volatile nature of the markets.
However, a key element of the stablecoin ecosystem is the reserves backing a stablecoin.
Now, these reserves are the last backstop on a stable coinβs value.
Without using them, the coin issuer cannot guarantee the value of a stable coin with full confidence.
Lack of Confidence
Stablecoins are an emerging asset class that aims to bring the security and stability of central bank-issued currencies to the crypto-sphere.
The idea is that stablecoins are pegged to a specific asset, such as the US dollar, to eliminate the risk associated with cryptocurrencies.
A major risk of stablecoins is that by trusting a third party to print money and keep a cryptocurrency stable, the dollars could be fractionally reserved instead of fully backed.
Imagine in this case a bank run causing the price of the coin to drop dramatically.
Algorithms
As most decentralized stablecoins live within smart contracts in protocols like Ethereum or Stellar, thereβs a risk the algorithm which keeps the currency stable fails.
Algorithms could even be manipulated by a third party. Because βcode is lawβ, updates to the network can have unintended consequences.
As such, there is a need for standards and regulations.
Benefits of Stablecoin
- The ability to make quick payments
- Use for smart contracts
- Absence of intermediaries
- Privacy and transparency and the cost-effective way in general
Stablecoins help in the storage of capital. Virtual money is a concept that has been around since the early days of the internet.
It has evolved to include the ability to store values online and then have those values converted into an equivalent value in a real-world, physical form.
Online currencies are useful to mitigate risk, promote transparency and allow users to access their funds without the need for a bank.
The use of virtual money has had a profound impact on society and is evolving in new and exciting ways.
Stablecoins are a popular tool for cryptocurrency traders for a number of reasons: faster transaction speeds, lower fees, better liquidity, and a lower risk of volatility.
They also make it easier to trade on cryptocurrency exchanges as they allow traders to have one currency with which they can transact across different platforms.
However, in recent years, stablecoins have risen in popularity as they have become a popular tool in the blockchain world.
Learn to Earn with Stablecoin
With Stablecoins, you can lend them out to earn interest and you can also stake them.
Staking is a process where you can prove to the network that you own a particular amount of coins by locking up a percentage of your coins in a particular wallet.
When you stake coins, you will earn a reward for doing so.
There are many benefits to using stablecoins, the first being that it helps eliminate the panic that comes with a sharp drop in the price of the cryptocurrency.
For example, if the price of BTC falls from $10,000 to $7,000 in a week, it is likely that crypto traders will be quite worried about the future of their investments.
With stablecoins, such as Dai, traders are able to predict their profits with more accuracy and therefore not be afraid of a sharp drop in the price of the cryptocurrency.
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Conclusion
We hope you enjoyed our article about stablecoins. These assets are a great way to diversify your cryptocurrency portfolio while still enjoying the benefits of digital assets.
They provide you with a currency that is as close to the value of a fiat currency as possible without being downright perfect.
We hope this article helped you understand the concept of Stablecoin more clearly and effectively.