What are stablecoins – Introduction
Cryptocurrencies have high volatility, it means that the price of an asset has moved up or down over time.
High volatility can be a huge advantage. However, this makes some people afraid to invest. For this reason, Stablecoins was designed for.
These digital assets will reduce volatility. Therefore, a much lower rate will be noted. This will allow a long-term trade to perform better.
In this article, you will learn what Stablecoins are, why these digital currencies are so important and how to use them. We hope you find it interesting!
What are Stablecoins?
Stablecoins are a type of digital asset created to provide more stability in price, whose value is tied to an outside asset and backed by a reserve asset.
In general, Stablecoins are similar to fiat money e.g.: Dollar, Euro, Yen and so on. The coins’ volatility is related to the amount and position of the other asset.
That’s what makes it different from other cryptocurrencies. While digital currencies generally have no ballast, stablecoins have it.
What are Stablecoins examples?
Different types of Stablecoins are related to their different ballast and intrinsic value. Below, you will see which reserve assets Stablecoins can be connected to.
Cryptocurrency-collateralized
In this type of ballast, the similar assets ratio has to be different from 1/1. Because it would be as cryptocurrencies with no ballast (unstable digital currencies).
Consequently, digital currencies hitching must be made using more than one type of coin as well as the best of them in the market.
This type of ballast is decentralized , once cryptocurrencies have the same capacity.
Commodity-collateralized
All these commodities: Oil, iron ore, gold, wheat, soybeans and coffee can be backed by Stablecoin. Pax Gold (PAXG), for example, is backed by gold and Coffee Coin (CFC) is backed by coffee. In this case, 1 kg of green coffee is equal to 1 CFC.
Fiat money-collateralized
Fiat money (Dollar, Euro and Brazilian real) provide parameters for Stablecoins. Theter (USDT), the world’s third-biggest cryptocurrency by market value, is backed by Dollar (USD) – 1 USD for each Stablecoin.
Trustworthy company is different from the company that issues the national currency of certain countries, a trustworthy company is the issuer of Stablecoin. The amount of Stablecoin is equal to the amount kept in the bank.
Non-collateralized Stablecoin
These Stablecoins are not backed by any collateral and are decentralized in the true sense. These digital assets use an algorithmically governed approach to control the Stablecoin supply.
Stablecoins are currently not regulated in any meaningful way. This is a self-regulated system working as a Central Bank.
Why do Stablecoins matter?
Stablecoins attract more people to the world of cryptocurrencies, because they are stable, providing guarantees for afraid investors.
Many participants prefer the highest traditional digital asset volatility, which means that it can increase its value. On the other hand, other traders are more conservative. This type of investor prefers “to let things happen”.
How does a trader use Stablecoin?
First of all, for using Stablecoins the investors need to have a digital wallet and create their Stablecoin address to transfer and receive their payment in stable currencies.
An interesting feature of these coins is that if the cryptocurrency price (any digital currency) increases, the trader can convert the new value into Stablecoin.
It is possible to convert fiat money, however, in this case, it will be necessary to pay a higher fee. If the trader uses Stablecoin, the participant will pay a lowest fee. Besides, the investors can convert Stablecoin back to another cryptocurrency whenever they want.
What are stablecoins – Conclusion
Stablecoins have an interesting synergy with the other cryptocurrencies. Once one digital currency can back another cryptocurrency.
Furthermore, they are important to democratize their use, bringing more confidence to their investors.
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