Stablecoin is a type of cryptocurrency designed primarily to maintain a stable market value. It’s recognizable by the fact that it’s tied to something that has a relatively stable price. It can be related to FIAT currencies, such as the US dollar or other cryptocurrencies, as well as gold and other precious metals.
The main characteristic of a stablecoin is that it tends to be a globally accepted currency that isn’t tied to the central bank and is quite stable in terms of value. New projects that launch their stablecoins appear day by day, so from 2019, this type of digital currency is gaining more and more popularity in the crypto space.
This doesn’t mean that cryptocurrencies will completely die out – far from it. Encrypted blockchain technology, which supports them, is complicated for governments to control, so it’s unlikely that they will ever eliminate them.
Although the consolidation of cryptocurrencies occurs every four years in May, where new ones are created, and half of the old ones disappear, the long-term perspective of bitcoin-like cryptocurrencies isn’t a threat to the financial system. The easiest way to buy bitcoin and trade with it is via specialized platforms.
Types of Stablecoin
There are currently three types of stablecoins: Fiat-pegged stablecoin, Asset-backed stablecoin, and Crypto-collateralized stablecoin.
This is the most common type. With it, the coins are pegged to the US dollar, euro, or some other FIAT currency.
The issuers keep the total equivalent of coins in FIAT currency in their private vault or some other place. The location of the FIAT currency storage itself isn’t as important as the ratio of the amount of FIAT currency and the issued amount of the specific digital money, stablecoin. The rate is usually 1:1 allowing the price of one digital coin to reflect the value of one FIAT currency. Or at least that’s how it should be.
The most famous coins of this type are Tether, USDCoin, TrueUSD, and Paxos.
In this type of a stablecoin, the value of the coin is related to the price of some goods.
An example of an asset-backed stablecoin is the Digix Gold Token (DGX), whose value is related to the cost of one gram of gold. The gold, which should cover this token 100%, is kept in private vaults in Singapore.
This type of a stablecoin uses cryptocurrencies as collateral to ensure the stability of the coin price.
The most famous coin of this type is the Maker’s Dai (DAI). It’s a decentralized, cryptocurrency-backed coin that maintains its value using smart contracts that act in response to changes in market dynamics by automatically buying or selling cryptocurrencies such as ETH and MKR. This continues a stable DAI value.
Another advantage of this type of a stablecoin is that all transactions are entirely transparent thanks to blockchain technology.
What’s Stablecoin Suitable For?
Stablecoin is a safe zone for all users who want to reduce the risk of uncertainty in cryptocurrency prices or those who aren’t sure in the direction of specific expenses. Stablecoin allows us to quickly and easily exchange our cryptocurrencies for stablecoins.
If, for example, we trade on stock exchanges, the good thing is that this conversion can be cheaper or faster compared to changing cryptocurrencies directly for FIAT currencies.
Imagine a situation where the value of BTC, and thus most cryptocurrencies, drops drastically. In that case, we’ll ask to sell our bitcoin and move, at least in the short term, into the possession of some more stable cryptocurrency. Currently, there’s nothing more stable in crypto space than a stablecoin.
Also, traders often use them to quickly and efficiently transfer their funds from one platform to another.
Many stock exchanges don’t support FIAT currency trading. In these cases, trading in stablecoins appears as the only and excellent alternative.