What is a Stablecoin?
The term 'Stable Coin' is derived from
the two words "Stable" and "Coin". A stablecoin is a form
of value backed by a government. As it is backed by the government, it can be
used as an alternative method for financial transactions. However, it can also
act as a store of value. In most cases, these coins are in circulation and not
actually issued. Because money has no physical form, it is often called
"legal tender". Stablecoins have been widely used since the 15th
century and are still widely used today.
In the world of Cryptocurrency, a
stablecoin is a cryptocurrency with a twist. Rather than being
"mined" by an open, distributed network of computers performing a
combination of math and recordkeeping, a stablecoin derives its value from the
value of another asset. In short, a stablecoin is pegged to another underlying
asset.
A
stablecoin is "a crypto-asset that seeks to stabilize the value of a
'coin' by linking it to a pool of assets, making it a reliable and attractive
store of value." ASIC described stablecoins in a recent submission as
"a form of crypto-asset intended to maintain a stable value against a
specified unit of account or store of value," such as the dollar or gold.
A stablecoin has some or all of the characteristics of 'money', as a unit of
account, a means of payment, and possibly as a store of value.
As we said
stablecoin is a cryptocurrency whose value is pegged to another asset, most
often currencies such as the US dollar or the euro, although other assets are
possible. This type of cryptocurrency tracks the underlying asset, making its
value stable over time, at least relative to the currency it's denominated
against. In fact, it is as if the underlying asset has gone electronic, like,
for example, the digital dollar. What happens in this form of stablecoin
cryptocurrency is that these coins have the same value as normal currency. This
means, if your currency is $1 then each stablecoin crypto will be worth $1. So,
these two currency ratios will always be 1:1. This is the main element of
stablecoin.
A
stablecoin is a type of cryptocurrency designed to maintain a fixed value over
time. A stablecoin's value is usually pegged to a specific real currency, often
the US dollar. In this setup, one unit of cryptocurrency is usually equal to
one unit of real currency. Unlike highly volatile cryptocurrencies like
Bitcoin, stablecoins do not fluctuate in value.
Types of Stablecoin
The
most popular type of stablecoins is called traditional asset-backed
stablecoins, also known as pegged cryptocurrencies. This type of stablecoin is
backed by a traditional asset, such as a national currency or gold. Each
stablecoin is invested in a 1:1 ratio of assets.
Stablecoins
are blockchain-mapped digital currencies that are typically traceable through
one of four primary collateral structures: fiat-backed, crypto-backed,
commodity-backed, or algorithmic. While the underlying collateral structures
may vary, stablecoins always have the same goal: stability.
You
might think that all stablecoin cryptocurrency have the same type of algorithm.
However, that is not the case here. You will find a list of different types of
stablecoins in the market with different mechanisms. These are generally divided
into four different coins.
Stablecoins
offer a way to bridge the gap between fiat currencies like the US dollar and
cryptocurrencies. Because they are price-stable digital assets that behave
somewhat like fiat but retain the mobility and utility of cryptocurrencies,
stablecoins are a new solution to crypto volatility: price stability directly.
It is included in the assets itself.
Stablecoins
are a type of cryptocurrency designed to offer more stability than other
cryptocurrencies. Some are actually backed by a reserve of the asset they
represent. Others use algorithms or other methods to protect their values
from too much volatility.
Advantages
and Disadvantages of Stablecoins
Despite
the fact that stablecoins may be less volatile than other forms of crypto, they
are still using new technology that may contain unknown bugs or
vulnerabilities. And there's always a chance you could lose the private keys
that give you access to your cryptocurrency, either through a hack or user
error.
Stablecoins
provide some stability that most cryptocurrencies lack, making them unusable as
actual currencies. But people who use stablecoins should know what risks they
are taking when they own it. Although stablecoins seem to have limited risks in
most periods, stablecoins can become the riskiest in a crisis when they should
be the safest to own.
Thus,
stablecoin cryptocurrencies are very important for cryptocurrency investors,
cryptocurrency exchanges and the overall cryptocurrency market. For example,
take the Tether stablecoin for example. Tether is backed by fiat money, and you
can trade Tether for just $1. So, you see how the Tether stablecoin can
counterbalance the volatile nature of cryptocurrencies.
The
most immediately apparent benefit of stablecoin technology is its utility as a
medium of exchange, effectively bridging the gap between fiat and
cryptocurrency. By minimizing price volatility, stablecoins can achieve a
utility that is completely separate from owning legacy cryptocurrencies.
One
of the negative aspects of this type of stablecoin has to do with trust and
centralization. Unlike many cryptocurrencies, which are decentralized,
traditional asset-backed stablecoins are centralized, meaning they are run by a
central institution, such as a bank. This requires trust that the entity is
actually backing up its stablecoins with a real traditional asset.
Conclusion
Stable coin derives its
value from another asset means stablecoin is pegged to another underlying
asset, most often currencies such as US Doller or Euro. If the pegged asset
value is 1 USD, then each stablecoin will also be worth 1 USD. The ratio of
both will always be 1:1. There are Four types of stablecoin;
1)
FIAT-Backed
2)
Crypto-Backed
3)
Commodity-Backed
4)
Algorithmic
Although
stablecoins seem to have limited risks in most periods, stablecoins can become
the riskiest in a crisis when they should be the safest to own. Stablecoin
cryptocurrencies are very important for cryptocurrency investors,
cryptocurrency exchanges and the overall cryptocurrency market. The most common and widely
known example of stablecoin is Tether stablecoin.
If you want to learn more about this topic, feel free to leave your
valuable comments. We are happy to assist you. All the best for your future.
(All the material
in this article is only the author's opinion, and could not be considered as
"Financial Advice")
Key Words:
Stablecoin
Stablecoin in Crypto
Stablecoin of Tether
Stablecoin Staking
Stablecoin of Luna
Stablecoin collapse
Stablecoin Crash
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