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An Introduction to Stablecoins

An Introduction to Stablecoins

Cryptocurrencies are known for being extremely volatile, particularly when contrasted to traditional financial instruments like equities and bonds. The appeal to invest in cryptos is reduced due to this volatility. Many investors don't like high risk, and cryptocurrencies can sometimes be. The risk of losing money is always there when investing in any token or coin. But it's also as easy to become a billionaire out of the blue - the latter draws some investors.

After encountering this problem, a subdivision of digital currencies was created to hold steady prices and make sure that the value provided doesn't fluctuate. This is what we call Stablecoins. Cryptocurrencies that have gained great relevance these days. Of course, bitcoin, ether, and other tokens are still preferred by the vast majority of investors. However, Stablecoins have become indispensable in the crypto world. Especially with their unique range of applications that help enthusiasts, investors, and other parties.

In this article, we will discuss what stablecoins are, how they differ from mainstream cryptocurrencies, and how to put them into use these days.

Are Stablecoins considered cryptocurrency?

Stablecoins are regular cryptocurrencies that hold an interesting twist. A stablecoin's price is derived from the worth of another asset, rather than being mined by an open, dispersed network of computers conducting a combination of arithmetic and record-keeping.

Stablecoins are digital assets that aim to ensure exchange rate stability in the cryptocurrency market. Their value links to fiat currencies such as the dollar or the euro. These currencies are available on a blockchain that behaves similarly to cryptocurrencies. That is why they enjoy some benefits of being a cryptocurrency (transparency, security, privacy) without the extreme volatility that other types of digital currencies have.

Which are the most popular Stablecoins?

Tether (USDT) is the most popular one on the market and has the largest trading volume and market capitalization of any stablecoin.

Another of the most widely used stablecoins is the USD Coin (USDC). This is becoming quite popular and more so as the cryptocurrency market matures. It is also backed by USD and is based on the popular Ethereum protocol (ERC-20). When you compare the two most popular stablecoins you can see why they’re the most popular ones currently. Binance USD (BUSD) is a stablecoin earning its place among the most popular ones. It is fully backed by US dollars and guarantees faster ways to fund your transactions.

How can you use Stablecoins?

Stablecoins are primarily used to facilitate trades on cryptocurrency exchanges. Rather than purchasing bitcoin using fiat currency such as the US dollar, traders frequently exchange fiat for a stablecoin. They then trade this for another token such as ether or bitcoin. In this way, stablecoins are analogous to casino chips for crypto exchanges.

Each of the most widely traded stablecoins associate with a particular exchange:

  • Tether with Bitfinex
  • USD coin - Coinbase
  • Binance USD - Binance

Mitigate trading fees

There are several purposes for these coins, including staking and lending. However, investors use them to reduce the impact of trading fees. When exchanging dollars for a specific stablecoin, you commonly won't pay additional fees.

Let's take Coinbase as an example. If you want to buy bitcoins they will get a commission for it. Usually, this is less than a dollar. However, Coinbase doesn't charge any fees on USDC to US dollar transfers.

You can convert your bitcoin into a less volatile asset, such as a US dollar coin or tether if you need to liquidate it soon. According to Coinmarketcap, a worldwide cryptocurrency market data company, Tether currently represents more than half of all bitcoin exchanged for fiat or stablecoins.

Remittances

Another way in which stablecoins are put to good use is remittances. It consists of transferring cash across international borders and helping unbanked populations in particular.

In September, the Stellar blockchain introduced Sol Digital, which links to the sol (Peru's national currency). It can be sent between people in different nations without having to pay the high costs for cross-border money transfers

This is where one of bitcoin's greater purposes: providing relief to populations suffering from rapid inflation. Who could maintain purchasing power by shifting funds from a struggling local currency to a stablecoin. The stablecoin would potentially be immune to the region's inflation as long as it doesn't tie to the local currency.

Do Stablecoins need to link to a national currency?

The most popular ones indeed link to the US dollar for the time being. Tether, USD Coin, and Binance USD are all worth around $1 each. However, as above, the underlying asset doesn't need to consist of a national currency.

Stablecoins usually link to national currencies because they're quite steady and reliable. But the asset may also be a commodity. For example, gold (e.g: Kitco gold), an algorithm (e.g: DAI), or another cryptocurrency such as bitcoin (as happens with bitUSD).

What makes Stablecoins different from traditional cryptocurrencies?

Traditional cryptocurrencies have no central authority and people administer them. Stablecoins are distinct in that central authority issues and manages them. When you acquire one, you're agreeing that the coin's issuer holds a sufficient amount of the asset to which it links to.

The asset reserve provides the stablecoin with its value, and also functions as the collateral. The stablecoin's price remains stable as long as the value of the assets remains stable. That is why most of them are linked to national currencies. As there are no US regulations to manage stablecoin reserves, this equation is dependent on trust. You're relying on the reserve's existence and accurate valuation.

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