Everything you need to know about stablecoins

Investing in cryptocurrency has its fair share of risks. One of the reasons why some people veer away from the idea of investing in digital tokens is its volatile market. Meaning,  their value can unexpectedly increase or decrease at any given time which leads to extreme price fluctuations. This is what stablecoins aim to solve.  If you’re eager to learn more about them, here’s everything you need to know:

Stablecoin meaning

Similar to regular cryptocurrencies, stablecoins are a form of virtual currency that runs on the blockchain. However, their difference is that stablecoins are backed with real-life commodities such as fiat or gold to lessen extreme price fluctuations.

How do stablecoins work?

Stablecoins are specifically designed to make their value susceptible to price fluctuations. Although it doesn’t make them immune to price changes, it won’t be at an extreme level. They achieved this by being backed by either a centralized financial system, commodities and even other cryptocurrencies. This, along with having built-in stability in the assets themselves, helps them withstand the volatile market.

One of the reasons why people are hesitant to invest and utilize their tokens is price fluctuations. Because of its stability, investors can use these stablecoins as a medium of exchange and even storage for monetary value without worrying about losing their purchasing power in a snap.

What are the different types of stablecoins?

To give you a better understanding of stablecoins, you’d have to learn the different types that it has spawned ever since it was first invented. These are:

Fiat-collateralized

Fiat-collateralized stablecoins are tokens backed by fiat currencies. How it works is that investors will buy their chosen coins using their choice of fiat and it has a 1:1 ratio. Meaning, every single unit of their fiat currency is equal to one stablecoin.

For example, if someone were to invest 5 million USD, they will have 5 million stablecoins with each one being worth one US dollar.

Fiat-collateralized coins are also known as traditional collateral which operates on an off-chain asset and it’s the most popular type of out all. Some of the most famous stablecoins under this category include:

• Tether (USDT)
• Paxos Standard (PAX)
• True USD (TUSD)
• Gemini Dollar (GUSD).

Crypto-collateralized

The assets that stablecoins are backed with aren’t limited to fiat and other forms of commodities and that’s where crypto-collateralized coins come into play. Usually, crypto-backed tokens use complex algorithms to keep their value stable. 

At first glance, it may seem like a bad idea considering how volatile the crypto market is but how these coins work is that they are over-collateralized. This acts as a built-in cushioning that can help ensure the stability of the coin’s value.

An example of this would be that a 2USD crypto-collateralized stablecoin is pegged to a crypto asset that’s worth more which in this case can be 4USD. This is so that when it decreases in value it will still be worth 2USD.

Several crypto-collateralized stablecoins exist on the market but one of the most prominent is  Dai, which is a token that runs on the Ethereum blockchain. Its goal is to keep its value as close as possible to the United States dollar.

Precious metal-collateralized

Precious metal-backed stablecoins are tokens pegged after natural minerals such as gold or silver. How it avoids the volatility of the crypto market is by featuring a centralized system which is something that other crypto investors may steer away from.

Gold is the most common precious metal that is used to back stablecoins. One common example is  Digix which lets traders invest in gold without requiring them to transport and store them.

Usually, the amount of gold used to back a token depends on the value per ounce. For example, a certain measurement of a gold bar can back a single token. However, the ratio still depends on the company issuing the stablecoin.

Different uses of stablecoins

Stablecoins provide different uses depending on the need of the user. Here are two of the most common things that you can do with stablecoins: 

Daily medium of exchange

Because of the value that stablecoins hold and how they essentially bridge the gap between fiat and cryptocurrency, they can act as your everyday currency. This means that you can use it the way you would with your fiat currency but it has the added benefit of being stored online.

Once you find a participating merchant, all you have to do is pull out your phone to pay for whatever it is you’re buying, whether it be a cup of coffee, clothes, gadgets, etc.

Overseas payments

The great thing about stablecoins is that they don’t require any fiat conversions which makes them perfect for overseas payments. With this advantage, you can avoid expensive transaction fees that stores and banks may require you to pay if you’re doing cross-border transactions. 

Seamless money transfer

People who work overseas will get to enjoy this benefit the most. stablecoins allows its users to transfer money in real-time without having to worry about long waiting times and expensive fees.

Companies such as Western Union will require you to pay hefty fees in exchange for a money transfer that would take up to several days. With stablecoins, all of that becomes obsolete as your recipient will receive the money that you’re transferring almost instantly even if they’re across the globe. The best part is, the transaction fee won’t be as expensive.

Best stablecoins by market capitalization

At the time of writing, here are the top 5 options ranked by market capitalization according to Ethereum’s website:

1. Tether – $74.7 billion 
2. USD Coin – $34.3 billion
3. Binance USD – $13.6 billion
4. Dai – $8.3 billion
5. TrueUSD – $1.2 billion.

Ensure safe crypto investments with stablecoins

Now that you’ve learned everything you need to know about stablecoins, it’s time for you to decide whether or not you want to invest in them. If you’re someone who wants to enter the crypto world but find the volatility too risky, this is a great option for you as it provides value stability. Learn more about crypto and blockchain updates here BTC Post!