What is a stablecoin and why is it needed

What is a stablecoin and why is it needed

In the world of cryptocurrencies, there are such coins, the value of which is tied to a specific physical asset, the so-called stablecoins - a special type of digital coins that helps speed up the appearance of money in real life.

In this article, we will go through the definition, the principle of operation, the pros and cons, and so on, so we recommend reading it. We think it will be interesting.

What is a stablecoin: how it works


Stablecoins are digital assets designed to mimic fiat currencies such as the dollar or the euro. They allow traders to transfer stable assets around the world cheaply and quickly.

It is far from a secret that such cryptocurrencies as Bitcoin и Ethereum known for their volatility relative to fiat. This is because blockchain technology is still very new and crypto markets are relatively small. The fact that the value of a cryptocurrency is not tied to any asset is interesting from a free market perspective, but can be a problem when it comes to usability.

As a means of exchange, cryptocurrencies are technologically more convenient, but fluctuations in the exchange rate make them a risky investment, as well as an inconvenient means for making payments. By the time the transaction is completed, the value of the sent coins may differ significantly from the original.

Therefore, a stablecoin was created, which does not have such a problem. Assets of this type are characterized by insignificant price dynamics and changes in the value of the underlying asset or the fiat currency they emulate.

The principle of operation of stablecoins is no different from physical money. The value of the coins is equal to the assets, their ratio is set as 1:1, and they are also used to store capital, settlements or exchange.

Ways to ensure stability


A coin can maintain its stability in many ways:

  • fiat-backed stablecoins;
  • crypto-backed stablecoins;
  • algorithmic stablecoins.

Stablecoins that are pegged to fiat money cost the same as their fiat counterparts. One coin is equal, for example, to 1 dollar, which acts as a pledge that ensures the value of the cryptocurrency. This type of stablecoin has little volatility, but centralization is a negative factor. This method is the most popular.

The value of stablecoins that are pegged to cryptocurrencies is backed by either a certain cryptocurrency or several at once. The main disadvantage of this method is volatility, but the advantage is decentralization and ease of liquidation if necessary.

The last method, which is called algorithmic stablecoins, is characterized by the fact that in this case, stablecoins are not tied to fiat or cryptocurrency. Instead, their binding is provided by the algorithms and smart contracts that govern the issuance of tokens. Functionally, their monetary policy is exactly the same as the policy of central banks in relation to the management of national currencies. This type of coin has decentralization. He is not bound by various pledges, has no obligations. If necessary, the issue of coins is reduced or increased.

Use cases for stablecoins


In fact, the list of stablecoins is quite large, but we will highlight only the most popular and secured ones today:

  • Tether (USDT). It is supported by fiat money, for the safety of which the bank in Hong Kong is responsible;
  • Binance USD (BUSD). The dollars, which are the collateral of the token, are stored in the bank accounts of Paxos Trust. Each time dollars are received into the bank accounts of this company, allocated to provide Binance USD, a corresponding number of tokens is generated;
  • TrueUSD. A stablecoin pegged to the value of the US dollar. Created by American developers, based on Ethereum;
  • Paxos Standard (PAS);
  • USD Coin (USDC).

Pros and cons of stablecoins


Stablecoins are a universal medium of exchange in the cryptocurrency world, which is their main advantage. Due to high volatility, cryptocurrencies cannot be widely used in day-to-day transactions such as payment processing. The rate of stablecoins is predetermined and predictable, which solves this problem.

By providing protection against volatility, stablecoins are also involved in the integration of cryptocurrencies with traditional financial markets. Currently, these two markets exist as separate ecosystems with rather limited interaction.

In addition to their utility in financial transactions, stablecoins can be used by traders and investors to hedge their portfolios. Allocating a certain percentage of the portfolio to stablecoins is an effective way to reduce overall risk.

Despite the potential of stablecoins as a means of widespread adoption of cryptocurrencies, they still have certain limitations. Fiat-backed stablecoins are less decentralized than regular cryptocurrencies, as they require a central entity to hold the backing assets. For crypto-backed and uncollateralized coins, users must trust the community (and source code) to ensure the longevity of such systems. These are still new technologies, so it takes time for them to reach maturity.

Conclusion


Despite the fact that stablecoins have a number of disadvantages, they are an important component of the cryptocurrency market. Thanks to various mechanisms, this type of digital currency, with its fixed price, can remain more or less stable. This allows them to be used not only as a means of exchange, but also as a way to fix the balance for traders and investors.

Stablecoins are a powerful tool that can strengthen cryptocurrencies and act as a substitute for unstable alternatives where it is not practical.

We believe that with this article, we have closed the issue of stablecoins and we hope that it was useful for you. Successful and profitable investment!

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Комментарии (16)

  1. Wael77 31 August 2022 14: 46

    Thank you for the article!

    A complaint
  2. mmnnvv1986 1 June 2022 02: 03

    Thank you for the article. Very informative...

    A complaint
  3. Mihhha April 26 2022 18: 33

    Recently, the economic crisis has been gaining momentum. The international banking system is destabilizing more and more. I think that stablecoins and cash are the best protective assets at the moment. Good luck to everyone !!!

    A complaint
  4. Mihhha 14 March 2022 19: 40

    Stablecoins are an excellent tool for fixing profits in trading, investments and, of course, in the HYIP industry, they are becoming more and more widely used. The article will be useful to all both beginners and experienced investors to consolidate knowledge, Thank you.

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    1. Wael77 31 August 2022 14: 43

      I can't understand why people are buying huge amounts of these coins even though They are known for their volatility!

      A complaint
  5. Akimskate 1 February 2022 09: 15

    Thanks for the helpful article!

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  6. Mihhha 1 February 2022 02: 55

    A very useful article for all users of the HYIP industry in connection with the entry of electronic payment systems under regulation,

    A complaint
    1. UdayAS8 14 March 2022 13: 49

      Well, we all thought that Perfect Money will disappear but it looks like that won't happen since every project now use Paykasa

      A complaint
  7. 4difeer666 1 February 2022 01: 17

    Thank you for the article!


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  8. levnks 31 January 2022 20: 35

    Thank you for the article.

    A complaint
  9. UdayAS8 31 January 2022 17: 37

    Thanks for the new article Richie 

    Personally i only use stable coins cause I'm afraid to lose in the floating currencies lol


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    1. levnks 18 February 2022 09: 28

      I support it, it is very dangerous..

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      1. UdayAS8 18 February 2022 11: 37

        Bro imagine that my first try to by some crypto coins was 30$ of Bitcoin when it was 64000$ cause i thought it would go much higher, so now I'm waiting for eternity until Bitcoin rise again and sell what i have hhh

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        1. levnks 18 February 2022 11: 44

          yes, but I don't have so much of course, but still I also failed on TRX, the rate fell and now I'm waiting for it to be the same
          and so I sympathize with you brother

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          1. UdayAS8 18 February 2022 15: 45

            Hopefully in the upcoming period all experienced traders say that the crypto prices will go up and so then we can sell without a lose brother

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            1. levnks 18 February 2022 19: 22

              Yes, I think this will happen soon, otherwise I want to go on vacation in the summer :)

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