A cryptocurrency is a digital asset that is encrypted and operates independently from central authorities.The technology behind cryptocurrency is known as blockchain, and it functions as a decentralized kind of digital currency.
Unlike the United States dollar or the euro, which are both managed and maintained by a government’s central authority, the value of a cryptocurrency is not managed or maintained by any central authority.
Stablecoins are a type of cryptocurrency whose value is linked, or tethered, to that of another currency, commodity, or financial instrument. Stablecoins are an attempt to provide an alternative to the high volatility of the most popular cryptocurrencies, such as Bitcoin, Ethereum, Solana, and so much more.
Here are 10 things for you to know more about what stablecoin is and how it functions.
Stablecoins Backed By Fiat Currency
There are different types of stablecoins. One of them are crypto coins that are backed with real money. Both Tether (USDT) and TrueUSD (TUSD) are well-known stablecoins that are pegged in value exactly to the dollar and are backed by reserves of United States dollars.
These reserves are looked at on a regular basis by outside parties who are considered to be independent stewards.
Stablecoins that are backed by fiat currencies, like the United States dollar, are called fiat-collateralized stablecoins. These stablecoins keep a reserve of one or more fiat currencies, like the dollar, as collateral to guarantee their value.
Other types of collateral can include precious metals like gold or silver, as well as commodities such as crude oil; nevertheless, the majority of fiat-collateralized stablecoins have reserves in the form of United States dollars.
Stablecoins Backed By an Algorithm
Stablecoins based on algorithms might or might not have underlying reserve assets. The fundamental difference between them is the approach taken to maintain the value of the stablecoin by managing the supply of the stablecoin using an algorithm, which is effectively computer software that executes a predetermined formula.
As defined by MUO, this type of stablecoin is based on the employment of algorithms in order to keep a constant value. In most cases, these algorithms link two different coins and subsequently alter the price of each coin based on the supply and demand of investors.
Although the value of an algorithmic stablecoin is linked to that of a real-world asset, the stablecoin itself is not backed by any such asset.
An example of an algorithmic stablecoin is the TerraUSD (UST), on the Terra blockchain. Just recently, the dollar peg of UST lost its value, resulting in the evaporation of billions of dollars as the Terra stablecoin crashed.
Stablecoins Backed By Cryptocurrency
Lastly, another kind of stablecoin is coins backed by other types of cryptocurrency that are much more valuable and stronger in the market. According to Investopedia, stablecoins that are crypto-collateralized are backed by a variety of other cryptocurrencies.
An example of this is MakerDAO’s Dai (DAI) stablecoin. It is tied to the value of the United States dollar while also being backed by Ethereum (ETH) and other cryptocurrencies with a combined value equal to 150 % of the amount of DAI stablecoin that is currently in circulation.
The value of the cryptocurrency kept in reserves is greater than the value of the stablecoins that have been issued. This is due to the fact that the reserve cryptocurrency may likewise be subject to significant levels of volatility.
A cryptocurrency with a value of $2 million might be kept as a reserve in order to produce a crypto-backed stablecoin with a value of $1 million. This would provide protection against a price volatility of 50 % in the reserve cryptocurrency.
An advantage of a stablecoin that differs from other cryptocurrencies is the fact that it is stable and does not fluctuate, crash, or increase dramatically.
Because their prices are fixed to a reserve asset such as the United States dollar or gold, stablecoins bridge the gap between the world of cryptocurrencies and the everyday use of fiat currencies.
This results in a kind of digital money that is more suited for anything from day-to-day commerce to conducting transfers between exchanges because volatility is drastically reduced as compared to something like Bitcoin as a result of this process.
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A fact that has been mentioned about these types of cryptos is their behavior towards volatility.
Since stablecoin cryptocurrencies are backed with real fiat money or other assets, there is definitely low volatility. A stablecoin is a type of cryptocurrency that relies on a more stable asset as a basis for its value.
Most commonly, people refer to stablecoins as linked to a fiat currency, such as the U.S. dollar, but they can also have value linked to precious metals or other cryptocurrencies. Stablecoins are essentially less volatile cryptocurrencies with greater potential to resemble the types of currencies people already use every day.
Just like stocks and any other cryptocurrency, these coins are tradable. You do not need a bank account to store or trade your coins. As long as you have your preferred trading platform, you can basically trade them at any time and anywhere.
Since it has been mentioned that stablecoins are less volatile, they do not promise an enormous amount of reward in trading, unlike the levels of trading in the small market cap or in the crypto market.
Since it can be traded, you can also hold your stablecoin as an asset. Holding stablecoins is also a bit safer compared to other meme coins since they do fluctuate in value that much. On the contrary, since most stablecoins have a $1 dollar peg, expect their value not to skyrocket immediately.
For any of you out there looking for a reliable and safe cryptocurrency asset to invest in, you can definitely count on a stablecoin. Just like any other cryptocurrency, you can definitely add this to your investment portfolio.
Just like any other trade or investment, stablecoins also grow at a sustainable amount of interest. When comparing these crypto coins to traditional investments, most of the time, the cryptocurrency would yield a higher rate of return.
Stablecoins exist on the blockchain technology, which means they can be accessible everywhere around the world. With that, you can easily transfer money from your friends, colleagues, and family or immediately donate money to charities at a very cheap cost.
Sending, receiving, or just overall transactions in cryptocurrency are fast and done so in a way where processing fees cost very little.
According to Coinbase, people have been able to send a total of one million dollars worth of USDC with transfer fees amounting to less than one dollar.
Crypto coins can be used to buy goods. Numerous retail enterprises are now accepting payments through the form of cryptocurrency. As an example, just recently, the Italian fashion brand Gucci now accepts cryptocurrency as payment in their selected branches.
In its flagship stores all throughout the country U.S., including those on Rodeo Drive in Los Angeles, Wooster Street in New York, and the Las Vegas Fashion District, Gucci has started accepting cryptocurrencies as a form of payment.
Litecoin, Bitcoin, Bitcoin Cash, and Wrapped Bitcoin are the five stable coins that the brand accepts.
In addition to that, Shiba Inu and DogeCoin, two of the most well-known meme-based cryptocurrencies, are also accepted.
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Read More:10 Things to Know About Stablecoins