While cryptocurrencies have been around for more than a decade, they only recently seemed to enter the mainstream. In fact, there were people who seemed to become millionaires practically overnight through cryptocurrencies.
But while coins like bitcoin and ether have a lot of benefits, they are also very volatile in price. This is what makes stablecoins so appealing.
What are stablecoins? That’s a great question. And we have the answers that you’re looking for!
So keep on reading and we will take you through everything that you will want to know.
- What Are Stablecoins?
Stablecoins are cryptocurrencies that try to offer price stability. They are backed by a reserve asset.
With a stablecoin, you get the security and speed of crypto but the stability of standard fiat currencies.
Because the value of bitcoin can rise and fall so quickly, people don’t want to spend their bitcoins. Instead, they save the coins and hope that they will increase in value.
A stablecoin lets you use coins that are linked to dollars or euros but on a crypto exchange.
- What Are the Types of Stablecoins?
It wouldn’t be completely unpredictable if the value of bitcoin evaporated in a very short amount of time. This is unlike to happen with a fiat currency, like the US dollar, because it is backed by the US government. This is how you get price stability in fiat money.
This also means that fiat money is controlled by a central authority, like the US Federal Reserve.
A fiat-collateralized stablecoin maintains a fiat currency reserve as collateral to issue a certain number of coins.
A crypto-collateralized stablecoin is backed by other cryptocurrencies. Because the reserve crypto might be vulnerable to volatility, these stablecoins keep a large number of tokens in reserve.
A non-collateralized stablecoin doesn’t use any reserve. Instead, it includes a working mechanism, like a central bank, to keep a stable price.
For example, the dollar-pegged basecoin uses a consensus mechanism to change the supply of tokens on a need basis.
This is not too different from a central bank printing money to stabilize prices.
Stablecoins are traded on open-source blockchain payment platforms like Terra (LUNA). The LUNA price can be volatile when investors flock to or flee stablecoins.
- Stablecoin Regulation
Stablecoins are often under scrutiny by regulators. They have a large market cap and can possibly impact the broader market.
Some organizations want to regulate stablecoins, similar to how clearinghouses and payment systems are regulated.
The Importance of Knowing About Stablecoins
Now you know, “what are stablecoins?” As we can see, stablecoins allow people to utilize the power of the blockchain and cryptocurrencies.
However, they can also avoid a lot of the volatility and risk that comes with most tokens. Stablecoins have the potential to revolutionize the monetary markets.
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