It is no doubt that the value of the cryptocurrency has been increasing day by day in the digital world such as dogecoin or bitcoin. However, the volatility of these taken is most appealing to investors because the price keeps on fluctuating and you may either lose all your money or may become a billionaire overnight. Other than that, there is another subset that can hold a steady value that does not fluctuate. This stable cryptocurrency is Stablecoins and is playing a significant role in the prosperity of crypto markets. Let’s see what these Stablecoins are. Scroll down!
What Are Stablecoins?
Stablecoins are a type of cryptocurrency that maintains its price over time and provides a user with a backup of the specific assets to get rid of the volatility as well as the daily fluctuation of prices. Moreover, it allows the users to enjoy various benefits by using blockchain technology such as privacy, security, transparency, and low fees. It provides stability to the lacking cryptocurrencies to make them usable assets.
What Is the Purpose of Using Stablecoins?
Stablecoin works on the principle of blockchain technology which allows users to take benefits from minor opportunities. Like other crypto assets, the prices of the token do not fluctuate and are safe from volatility. It supports smart contracts and has been used widely on decentralized finance exchanges. It also enables users to transmit money internationally and pays wages in digital currency. By using stablecoins, the investors are not charged any fee for making transactions on a network.
What Can One Do with The Stablecoin?
If a user has stablecoins, they will be used in certain ways:
- Minimize volatility
- Earn interest
- Trade or save assets
- Transfer money cheaply
- Send internationally
What Are the Types of Stablecoins?
There are five basics types of Stablecoins:
1: Fiat-Backed - It is a type of Stablecoins which are tokens issued by intermediates that pin the value of coins equivalent to cash or reserves and allow the users to maintain their sales and purchases. It also provides the backup of bonds, loans, and investments. Examples are Binance Dollar (BUSD), Tether (USDT), and USD Coin (USDC).
2: Crypto-Backed - These are tokens that provide stable prices through overcollateralization of the cryptocurrency, as it uses decentralized structures to set the parameters to collateralize the Stablecoins such as MakerDao.
3: Algorithmic - These tokens maintain the stability of the market prices by an automated mechanism that fluctuates depending upon the demands - like Terra (UST).
4: Commodity Backed - These tokens are issued by intermediates who assure to back the token in circulation with other supplies such as oil, silver, or cold - Example includes Paxos Gold (PAXG).
5: Asset Backed Multi-Collateral - This type involves the collateralization of the stablecoins such as USDC, DAI, wBTC, and stETH which provides exposure to the crypto assets.
What Are the Most Widely Used Stablecoins?
The following is a list of some of the most popular stablecoins:
- Tether (USDT)
- True USD (TUSD)
- Binance USD (BUSD)
- USD Coin (USDC)
- Dai (DAI)
What Are the Pros of Using Stablecoins?
There are many real-world uses of stablecoins, such as:
- Day-to-day currency.
- Streamlining recurring and p2p payments.
- Security against price fluctuations and currency exchange crashes.
- Fast and cost-efficient.
- Facilitating decentralized forex.
What Are the Limitations of Stablecoins?
The following are the pros of stablecoins:
- It is managed by one organization.
- It receives many regulatory blowbacks.
- It has less liquidity than regular cryptocurrencies.
- There is always a risk of crashing the underlying assets.
- It can be misused for money laundering or to break the law.
Stablecoins play a very dominant role in the prosperity as well as the progress of the crypto economy. It provides the users with price stability on a blockchain network. It also maintains a peg ratio of a fiat currency which determine the stability of the assets. Tough, it provides several advantages to the customers but they pose a certain risk as well.