Stablecoin is a new class of cryptocurrency that seeks to offer price stability and is backed by a reserve asset. Stablecoin aims to provide instant processing, security or privacy of payments of cryptocurrencies and stable valuations of fiat currencies without volatility. In this guide, we will also cover the key points about stablecoins and the differences between stablecoin and other cryptocurrencies. You can also find three different types of stablecoins and their examples in the following sections of our article.
While Bitcoin remains the most popular cryptocurrency, it tends to suffer from high volatility in its valuations. Bitcoin, for example, surged from $5,950 in November last year to over $19,700 in December, and dropped by two-thirds to around $6,900 in early February. Even the intraday price fluctuations of the leading cryptocurrency can be huge and harsh; It is common to see the main cryptocurrency move more than 10 percent in both directions in a matter of hours.
Such short-term volatility makes Bitcoin and other popular cryptocurrencies unsuitable for everyday use by humans. Basically, a currency should act as a medium of monetary exchange and a way of storing monetary value, and its value should remain relatively constant over longer time horizons. Users will refrain from accepting it if they are unsure of the purchasing power for tomorrow.
Ideally, a coin should maintain its purchasing power and have the lowest inflation enough to encourage spending rather than saving tokens. Stablecoins offer a solution to achieve this ideal behavior.
Reasons for Price Stability
The two main reasons for the price stability of fiat currencies are the reserves that support them and the timely market movements by controlling authorities such as central banks. Because fiat coins are pegged to an underlying asset such as gold or forex reserves that act as collateral, their valuation remains free of large fluctuations.
Even in some extreme situations where the valuations of fiat currency can move drastically, controlling authorities bypass and manage the demand and supply of the currency to maintain price stability. Both cryptocurrencies lack these core features. They do not have a reserve to support their value and they have no central authority to control prices when necessary.
Stablecoins try to bridge this gap between fiat currencies and cryptocurrencies. There are three categories of Stable Coins, all based on their working mechanism.s
What are the differences?
StableCoin is a type of coin that aims to protect investor funds from fluctuating markets, very different from the cryptocurrencies we know. StableCoin offers the usual cryptocurrency features such as Distributed data ledger, Blockchain and decentralized network, but with the difference of asset support.
Fiat-Secured Stablecoins
Fiat backed stablecoins are the simplest type of stablecoin. Simply put, fiat-backed stablecoins are backed by fiat money or precious metals such as the US dollar or other sovereign currencies. Centralized IOU stablecoins have value because they represent another asset. In other words, such stablecoins hold a fiat currency reserve, such as the US dollar, as collateral to issue the appropriate number of cryptocurrencies. Other forms of collateral may include precious metals such as gold or silver and commodities such as oil, but most fiat-collateralized stablecoins today use dollar reserves.
A common criticism of this type of stablecoin is that it is centralized and requires the trust of an issuing party and fairly intense regulation. When you deposit fiat into the bank account associated with the stablecoin, the network mints new coins. On the other hand, when you go to liquidate stablecoins, the network burns those coins and you get collateral.
Such reserves are maintained by independent custodians and regularly audited for required compliance. Tether (USDT) and TrueUSD are popular cryptocurrencies with a value equal to a single US dollar and backed by dollar deposits.
StableCoin: Conclusion
StableCoin has the feature of protecting investors with a stable cryptocurrency in a certain structure from uncertain ups and downs in the market. It plays an extremely important role in the markets by minimizing the risks of investors and traders.
The biggest reason why stablecoins have become so popular is that it removes uncertainty. Many users prefer stablecoins to get rid of the tension they experience, especially when converting a currency to crypto money. The stability that stablecoins offer is a feature that many countries fail to achieve in their national currency.
Stablecoins are designed to have a consistent and nearly fixed price over time. It is not possible to guarantee cryptocurrencies without stablecoins that combine the balanced prices of fiat currencies and the decentralization returns of cryptocurrencies in a single coin. Because when you turn your back, values can become worthless in a short time. For example, imagine that you receive your salary in cryptocurrencies; You can get very different numbers during the year. But Stablecoin eliminates that.
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