- Stablecoins are best used as a medium of exchange.
- They maintain stability by collateralizing different types of assets, including fiat currency, commodities and Financial Instruments.
What are Stablecoins?
Stablecoins are cryptocurrencies that maintain a constant value. This is because they are pegged to other assets. Stablecoins are of different types. Some are pegged to the fiat currency, while others are pegged to commodities or financial instruments. The reason for making stablecoins is to maintain the high Volatility of the crypto market.
The crypto markets are highly volatile if any network participant wants a secure and stable way of storing the crypto. While also enjoying the benefits of crypto, stablecoins are the best option for them. Stablecoins also have other benefits, which will be discussed further in this article.
The importance of Stablecoins
To Protect Against Volatility
Although Bitcoin is the biggest cryptocurrency in the market, with a market cap of almost $571 Billion and a market dominance of 54%, using this crypto for everyday transactions and stores of value is still dangerous. This is because of the high Volatility it offers. We obviously don’t want to be like that guy who ordered 2 pizzas for 10,000 Bitcoins. Hence, the crypto market should contain crypto, which is not as volatile as Bitcoin.
Medium of Exchange
Stablecoins can promote crypto use in normal day-to-day services as they maintain an exact value; hence, they can be used as a medium of exchange. They allow users to enjoy the advantages of secure, fast and private transactions and all the other benefits that cryptocurrency offers without worrying about Volatility.
Trade or Save Assets
Stablecoins can be held without the need for a bank account; at the same time, stablecoins can be sent around any part of the world and that too at a minimum transaction cost. They are a perfect alternative to the US Dollar.
Types of Stable Coins
Not all stablecoins are pegged to US Dollars; different stablecoins use different mechanisms to keep their value stable. Different types of stablecoins are listed below.
Fiat: These stablecoins keep U.S. dollars as collateral. These are the most popular types of stablecoins, as they offer minimum Volatility. Not only US Dollar developers are now developing stablecoins that are even pegged to other fiat currencies, one such initiative is BiLira which is a stablecoin pegged to the Turkish lira.
Cryptocurrencies: Some stablecoins even use other cryptocurrencies as collaterals. However, cryptocurrencies are highly volatile and not at all suitable to be kept as collaterals. These stablecoins keep 150% of the issued value of the stablecoin to deal with the Volatility.
Algorithmic Stablecoins: These coins use complex codes and algorithms to maintain their stability. They use demand and supply to maintain the value of the coin. For example, if the value drops less than one dollar, some coins are burned in order to maintain their value and new coins are supplied when the value rises more than one dollar. These stablecoins are mostly under-collateralized.
Stablecoins are a very good form of investing, especially when you do not want Volatility. But stablecoins were not always the safest form of investment. For example, when TerraUSD, an algorithmic stablecoin, crashed from 1 Dollar to 30 cents after it broke its parity peg to the U.S. dollar. Many times, stablecoins use unethical ways to maintain their stability. Although they are good sources for trading, investments should be made only with expert advice.