- Stablecoin explained
- Why we need stablecoins?
- Types of stablecoins
- How do stablecoins work?
- Now the question comes it worth considering stablecoin?
- The benefits of stablecoin
- How do stablecoins work?
- Are stablecoins safe?
- How do stablecoins make money?
- How many stablecoins are there?
- Which stablecoin is safest?
You might be pretty familiar with the cryptocurrency market, but sometimes you can be elusive about something, like, for instance, stablecoins. In simple terms, Stablecoins are a kind of cryptocurrency that has been designed for decreasing price fluctuations. It is a coin whose value is fixed to another asset such as fiat.
If you want to understand stablecoin, let’s dive deep into it:
Stablecoin directs to a kind of cryptocurrencies that obtains its market value from an external source. It mainly implies that when we compare stablecoin vs. fiat money, they are supported by a reserve asset like, for instance, during the Gold Standard era.
Because an asset backs stablecoins, it helps them maintain their price well and avoid extra volatility that primarily defines a cryptocurrency market.
Why we need stablecoins?
To understand the need for stablecoins, we need to know about the crypto market first.
A cryptocurrency is a kind of virtual currency that functions by using a decentralized network that is Blockchain technology. Users have acclaimed the whole process that is smooth, rapid, and private.
As because Blockchain is decentralized and is present in the public domain, therefore duplicating it is impossible. Cryptocurrency is not observed as a predictable asset, and its trading is also considered illegal in many countries. Consequently, it is a volatile asset class.
There is quite an uncertainty that surrounds the price movements of cryptocurrency. This means the trading direction varies within a short period. Such short-term volatility makes cryptocurrencies entirely unsuitable for daily use by retail investors or non-experts.
Cryptocurrencies are not just an asset but also currencies. They must have a stable value for an extended period. An investor requires assurance that the buying power of money will remain stable in the future. Cryptocurrency is not issued by the state, for which they must look for other avenues for stabilizing the price. Cryptocurrencies can’t be controlled by any authorities or any institutions like central banks.
When there is a mismatch between demand and supply, any financial mediators can’t be neutralized. To control the inflationary leaning of cryptocurrencies, users must get an assurance to spend tokens rather than saving them. Stable coin trading helps us bridge the gap between the stability of a fiat currency and cryptocurrency.
Types of stablecoins or stablecoin list:
Based on the working mechanism, stablecoins can be easily categorized:
1) Fiat-collateralized stablecoins: As the name says, this category of stablecoin is supported by sovereign currency like the pound or the US dollar. This implies that the issuer should provide a dollar reserve of the same amount as collateral for the issuance of a specific number of tokens of a cryptocurrency.
Some commodities like gold can also be used. These reserves are managed by custodians that usually work independently and are then audited for compliance frequently.
2) Crypto-collateralized stablecoins: The value of stablecoins crypto is pegged to that of other cryptocurrencies. The underlying asset here is also a cryptocurrency, therefore it is also not safe and remains highly volatile.
The term that refers to such type of stablecoins is “over-collateralization. It implies that a significant amount of reserve cryptocurrencies might be required for issuing even some small number of tokens.
3) Non-collateralized stablecoins: Those categories of stablecoins that do not require the utilization of any reserve asset. Instead, their stability is obtained from a working mechanism like the central bank. For example, the cryptocurrency base coin uses a consensus mechanism for determining whether it should enhance or decrease the token supply on a requirement basis.
How do stablecoins work?
Stablecoin crypto possesses a fixed value. This implies that the value of the cryptocurrency will not fluctuate much like in regular crypto assets. Some of the stablecoins that have just entered the market keep an aim to get fixed to the customer price index or other same indices of some countries. Because the stablecoins can be set to anything in theory, stablecoins are fixed to several fiat coins and some precious items such as gold or silver.
The essential factor for stablecoin is the maintenance of latch and what the entire system depends on. In simple words, how the coin organizer does maintains the currency value. Some of the central stablecoins, like tether, need a custodian to regulate the currency and then reserve some collateral. Tether keeps hold of the US dollar in a bank account, and then the amount held should be equal to what they are issuing to maintain the order of the whole system. In this way, the entire price fluctuation is prohibited.
Now the question comes it worth considering stablecoin?
Suppose you lack many ideas about Blockchain technology and do not know what to do when there are market conditions. In that case, you can keep the digital assets in a stablecoins wallet because cryptocurrencies are very volatile.
The volatility is sometimes so high that if you do not carry out trading perfectly. You might lose a lot of amounts. If you cannot keep a close eye on the market conditions, or if you are not much familiar with all these, it is better to stay stablecoin asset as the stablecoin price or stablecoin market does not frequently fluctuate like that of cryptocurrency.
Like the name, stablecoin prices also remain stable. When market conditions are not well, you can prohibit the risks by converting your digital assets into stablecoin staking. But if you are a trader for an extended period, then stablecoin binance is not something for you. It is because traders can quickly generate revenue from price increase or reduction of the cryptocurrencies. This is the reason why traders often remain away from stablecoin stock.
The benefits of stablecoin:
- Low fees, good stablecoin interest, and safe transaction. Somewhat anonymous or sometimes completely anonymous stablecoin market cap.
- Stablecoin act is stable and is backed by an asset.
- Helps in adoption. It offers a bridge between fiat to use of cryptocurrency.
- Stablecoin yield farming regulations involve fiat-based regulations.
Even though stablecoin seems to be a safe escape for many people, the damage they cause to the cryptocurrency should also be considered. It is the reason that when giant whales move down from the market, they can secure a massive blow to the cryptocurrency price while keeping themselves safe from the stablecoin.
Therefore, it is difficult to say that there exists a specific consensus on stablecoin existence.
FAQs (Frequently Asked Questions)
How do stablecoins work?
Stablecoins are a kind of cryptocurrency where the price is crafted to be pegged to another cryptocurrency. In most cases, these stablecoins work by helping users take a loan against an intelligent contract by locking collateral, thereby making it more worthful for paying off their debt when stablecoin decreases in their price.
Are stablecoins safe?
The stablecoins having support are subjected to the same risk and volatility that is often associated with a backing asset. If the backed stablecoin is supported in a decentralized manner, then they are safe from predation. But if there is a central vault, they might get robbed or suffer from loss of confidence.
How do stablecoins make money?
Some of the satblecoin generators have added a cash-out fee which is most necessarily a fee for pulling out your money. Other creators may charge you a fee for issuance and redeeming the coins while exchanging the underlying assets.
How many stablecoins are there?
Stablecoins are those cryptocurrencies where the price has been designed to be pegged to any cryptocurrency. Holders of backed stablecoins can quickly redeem the stablecoins at a conversion rate to take possession of the tangible asset. There are a total of 36 stablecoins available in the market.
Which stablecoin is safest?
Not all stablecoins are made equal. With an increasing number of stablecoins, it is often good to have beneficial and well-anchored choices. Some of the safest stablecoins are Tether, True USD, Pax Stablecoin gold, USD coin.