Stable Coins

 

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

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