What is Stablecoin?
Hey there, guys!
You already know we've discussed some currencies that are stablecoins, and even learned about one of them, such as Tether, the most recognized stablecoin currently available on the market. We've also uncovered a bit about how it operates.
Now is the time to expand our knowledge with more detailed information. Shall we?
Understanding Stablecoins
Essentially, a stablecoin is a type of currency whose value is tethered to that of a fiat currency - traditional, government-issued money. This linkage is crucial as it ensures stability in the stablecoin’s value, providing a higher degree of security compared to other cryptocurrencies.
This attribute makes stablecoins an ideal choice for everyday transactions and payments, allowing for the seamless hiring services or purchasing products.
Main Purpose of Stablecoin
When discussing Bitcoin (BTC) or other cryptocurrencies, it is crucial to address their high market volatility. Anyone familiar with the basics of cryptocurrencies is aware that their values are not stable, leading to frequent price fluctuations.
Due to this volatility, stablecoins are utilized to ensure stability and security. Essentially, they aim to maintain a consistent value relative to a fiat currency. For example, USDt is pegged 1:1 with the dollar, regardless of its market value, so the stablecoin mirrors the value of the fiat currency to which it is linked.
This approach guarantees that the value of the cryptocurrency remains stable through various mechanisms.
Why Are Stablecoin So Important?
Cryptocurrencies like Ethereum (ETH) and Bitcoin (BTC) have many benefits, but their prices can change a lot and are very unpredictable. Stablecoins are a type of cryptocurrency that are more stable and don’t change in value as much, making them a safer choice for people to use.
Stablecoins are designed to maintain a value equivalent to a specific fiat currency, thereby enhancing user confidence. For instance, it is increasingly common to compensate service providers with a stablecoin like Tether, which offers the assurance of stable, short-term payment
Types of Stablecoin
There are four primary types of stablecoins: fiat-backed, uncollateralized (algorithmic), crypto-collateralized, and commodity-collateralized.
Fiat-backed
Stablecoins are typically pegged to specific assets, such as fiat currencies, enabling the issuing company to maintain a reserve of assets that support the value of the digital currency. Commonly, these reserves are backed by the U.S. dollar, although there are stablecoins tied to other currencies like the euro (EUR) or the Turkish lira (BiLira).
In the case of the dollar, as with Tether (USDt) or TrueUSD (TUSD), these stablecoins are not only managed by independent companies but are also subject to regular audits. This centralized approach ensures additional reliability and transparency.
Uncollateralized (algorithmic)
Please understand this important method: to keep the coin's value steady, the company uses a computer program to control it. This program helps keep the coin's value from changing too much by adding or removing coins from use as needed.
This means the amount of money available can change based on how much people want it, which helps keep its price stable. But it's important to know that this method doesn't always mean there are actual reserves supporting the stablecoin; there might be reserves, or there might not be.
Crypto-Collateralized
Another approach involves stablecoins being pegged to other cryptocurrencies. However, it’s important to understand that these are subject to high volatility. This means that the value of the cryptocurrencies held in reserve can often exceed the value of the stablecoins issued.
For instance, MakerDAO’s Dai (DAI) is an example of a crypto-collateralized stablecoin. While it is pegged to the U.S. dollar, it is backed by Ethereum (ETH) and other cryptocurrencies, adding a layer of complexity due to the volatile nature of its collateral.
Backed by commodities
As mentioned previously, it is typical for certain stablecoins to be backed by reserves of assets, often in major currencies like the U.S. dollar or euros. However, there exists a variant where the coins are backed by interchangeable assets. Commonly, gold is used as a backing asset, as seen with Paxos Gold (PAXG) or Kitco Gold.
Moreover, some stablecoins extend beyond traditional assets, using real estate, oil, or other precious metals as collateral.
As demonstrated, it is possible to generate income through cryptocurrencies not only in U.S. dollars but also in forms such as gold, among others, providing avenues for passive income. While there are inherent risks, this method is generally more secure compared to other types of cryptocurrencies.
For those unfamiliar, Tether and various other cryptocurrencies can be managed using the Klever Wallet App. Consider downloading it to explore these options further.
