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What are Stablecoins? and Everything You Need To Know

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Stablecoins are cryptocurrencies that are often expressed in dollars. This article covers everything you need to know about Stable Coins.

What are Stablecoins? and Everything You Need To Know

Market volatility is indeed a big problem for most cryptocurrencies, but one thing about stablecoins is that it's designed to solve that problem by maintaining a constant value. 

Tether (USDT) was the first stablecoin that was introduced in 2014 as the first stablecoin.  The list has evolved to include more cryptocurrencies such as USD Coin (USDC), Dai (DAI), True USD (USDT), and Binance USD. 

Stablecoins are a relatively new type of cryptocurrency that is gaining popularity due to their dedication to reducing price volatility.


What Are Stablecoins?

Stablecoins provide crypto investors with stability and an escape from the volatility of crypto markets.

They are a type of cryptocurrency that is designed to be invulnerable to the extreme price volatility that affects digital assets and makes it impossible to use them as either a medium of exchange or a store of value.

They achieve this by pegging their currencies to the U.S. dollar at a rate of 1 to 1, for example. This is an attempt to keep the exchange rate stable.

What are Stablecoins? and Everything You Need To Know

Types of Stablecoins

Stablecoins guarantee price stability, but not all of them can deliver on that promise. Stablecoins, by design, use a variety of collateralization and price stabilizing measures to secure their pegs.

Stablecoins are classified into three categories based on the mechanism that keeps their value steady.

1. Fiat-collateralized stablecoins (Off-chain).

These type of stablecoins are backed by fiat currency, such as the US dollar. Precious metals like gold and silver, as well as commodities like crude oil, can be used as collateral.

To ensure stablecoin token redemption, collateral must be kept by a custodian and audited on a regular basis.

For example, USDT, USDC, BUSD and TrueUSD are popular stablecoins backed by dollar assets and tied to the US currency.

2. Crypto-collateralized stablecoins (On-chain).

Similar to fiat-backed stablecoins, crypto-collateralized stablecoins are backed by another cryptocurrency rather than a fiat currency.

The value of cryptocurrency kept in must reserves exceeds the value of the stablecoins produced, making this type of stablecoins over-collateralized.

Let's says, A $2 million cryptocurrency reserve might be used to produce a $1 million crypto-backed stablecoin, guaranteeing against a 50% decrease in the reserve cryptocurrency's price. 

MakerDAO's Dai (DAI) stablecoin, for example, is pegged to the US dollar but backed by Ethereum (ETH) and other cryptocurrencies worth 150 percent of the DAI in circulation.

3. Algorithmic Stablecoins

Algorithmic stablecoins, whether collateralized or not, rely on an algorithm, or a set of rules, to regulate the supply of tokens and hence maintain the value stable.

For instance, an algorithmic stablecoin may rely on a rule that mandates token supply fluctuations sufficient to preserve the stablecoin's value. This is comparable to the job of a central bank in increasing or reducing interest rates to maintain price stability. The distinction is that central banks such as the U.S. Federal Reserve establish monetary policy based on criteria that are well recognized and support this policy with an infinite supply of legal money. 

In a crisis, algorithmic stablecoin issuers such as TerraUSD lack these benefits.

A good example is the TerraUSD (UST) algorithmic stablecoin lost its peg to the U.S. dollar on May 11, 2022, after the Luna token used to peg Terra fell more than 80% overnight.


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What are the most important stablecoins?

There are lots of stablecoins in the market, but the major ones are USDT, USDC, and BUSD. Besides having the highest trading volumes, they also are the most trusted and adopted stablecoins. Not all of them contain the same level of trust or provide the same level of transparency though.


USDT

Tether (USDT) is a stablecoin, which is a digital asset that is tied to the price of another asset and backed by the same amount of value. The goal of Tether is for each USDT token to be worth one US dollar. As a token, USDT can be used on a number of blockchains, including the Ethereum blockchain.


USDC

The second-largest stablecoin, USD Coin, is entirely backed by assets in reserve. Through their joint company CENTRE, fintech Circle and cryptocurrency exchange Coinbase launched the USDc. USDc began as an ERC-20Token on the Ethereum blockchain, but it has now evolved to include Algorand, Solana, TRON, Stellar, and other blockchains.


BUSD

Binance USD (BUSD) is a stablecoin natively available on the Binance exchange platform. BUSD is a fiat-backed, government-regulated stablecoin. One US dollar is maintained in reserve for every unit of BUSD. In other words, the supply of BUSD is 1:1 tied to the supply of the US dollar.

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Benefits of Stablecoins

1. They offer security for traders and investors against market volatility.

2. Transparent: Transactions on the blockchain can be viewed from a blockchain explorer by anyone with internet access. Also, stablecoins can offer full transparency into the process by which they are backed through regular audits. 

3. Fees are lower. In most circumstances, such as between Tether wallets, transaction charges for stablecoins are very minimal or non-existent.

4. Transactions are processed at a high speed. Unlike transactions through financial institutions such as banks, stablecoin transactions take only a few minutes and may be performed even on weekends.

5. For those who don’t have access to a bank account, stablecoins can help unbanked send and receive money. All that one needs to have a stablecoin “bank account” is internet access.

6. Powering Decentralized Applications: stablecoins may be used as a stable payment method for decentralized applications, they help to create a more resilient decentralized application ecosystem.

7. Provide liquidity to DeFi projects. Thus, users can more accurately predict their profits and not be afraid of a sharp drop in the price of cryptocurrency.


Conclusion: What are Stablecoins? 

Stablecoins may become a viable alternative for remittances and cross-border payments because to their rapid growth, adoption, and expected regulation. As DeFi is a key driver of stablecoin growth, its volatility resistance is crucial. With LUNA's recent collapse and the structural concerns it poses, regulatory and legal scrutiny will undoubtedly increase.


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KIDIGITALI - Freelancing and Digital Marketing: What are Stablecoins? and Everything You Need To Know
What are Stablecoins? and Everything You Need To Know
Stablecoins are cryptocurrencies that are often expressed in dollars. This article covers everything you need to know about Stable Coins.
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