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What Is a Stablecoin?

What Is a Stablecoin

Stablecoins and cryptocurrencies continue to add more value today. Their existence has introduced many digital currency creations within the crypto space. Stablecoins is designed to specifically stabilize digital asset prices, rates, hence the name. To name a few, USDT, TUSD, GUSD, etc are basically considered stable coins.   

However, looking at how digital assets creation is rapidly increasing nowadays, this has accounted for many virtual asset insolvencies. Stablecoins are digital currency designed to specifically minimize price instability of ‘stable’ assets.

In other words, stablecoins are matched or pegged together to fiat-based digital currencies in ratio form. Example, stablecoins are more often pegged to the US dollar or any other commodity asset like gold, silver, etc.

As the name itself explains, stablecoins improve price stability within the cryptocurrency markets. Meanwhile, stablecoins evolution started in 2012. Wherein its exploration started specifically in 2015.

What Is a Stablecoin?

Upon hearing the name, can you guess what stablecoin will be? Now, let’s dive in. Stablecoins were created mainly to improve the coin’s stability. Stablecoin is designed in such a way that its value is tied to an outside of a digital asset.

This means that stablecoins maintain a steady value against a targeted price. 

However, stablecoins are becoming extremely popular nowadays. This is because it keeps adding value like transparency, security, and privacy to digital currencies.  Their influence in everyday life keeps growing rapidly.

Due to how stablecoins are increasingly growing, more and more companies keep jumping over its functions. This makes stablecoins more attractive to use within the crypto space.

Companies and other fintech’s adoption of stablecoins make it more viable as a digital currency. Hence, they are not subject to wild, price corrections, and fluctuations in price.

Nevertheless, regardless of what you want to use money for, stablecoins can be your hot cake. Also, stablecoins provide an extensive use case that even traditional crypto-asset can’t. However, stablecoins can be used to do insurance and even loans to be precise.

For peer-to-peer (P2P) transactions, its users can even go cashless and pay for goods and services using stablecoins. In other ways around, you can also use them for any investment means.  

In terms of processing speed and security, stablecoins can be considered anonymous.

Stablecoins does all the above said by building more confidence in its stable features.

Types of Stablecoins

Many people assume cryptocurrency is the only digital money ruling in this era. They are partly correct. Nevertheless, despite the hundreds and thousands of these assets existing, there are also lots of stablecoins also circulating. The most popular stablecoins are grouped into four parts. These kinds of stablecoins differentiate themselves from each other based on their characteristics.

They are:

a. Fiat-Collateralized Stablecoins
b. Commodity-Collateralized Stablecoins
c. Crypto-Collateralized Stablecoins
d. Non-Collateralized Stablecoins
Step-by-step, let’s read together and understand each type.

a. Fiat-Collateralized Stablecoin:

As said already, some stablecoins are backed mainly by fiat assets like the US dollar, GUSD, etc. Here, the fiat-Collateralized stablecoins primarily explain the stablecoin well. They are pegged in a 1:1 ratio in value with the fiat currencies. Check the below diagram statistics.

The fiat collateralized asset class is the most common stablecoins in the crypto market. Their value is primarily based on the backing asset.

Due to how they peg themselves with fiat-based currencies, their to-and-fro operations are mainly regulated by the US Securities and Exchange Commision (SEC). Check the below diagram statistics.

Statistics of Stablecoin Market
Statistics of Stablecoin Market (source: CoinGecko)

b. Crypto-collateralized Stablecoins:

As its name suggests, we noticed that the fiat-collateralized assets are specifically backed by fiat currencies, but here, it can be seen that Crypto-collateralized Stablcoins are backed by cryptocurrencies but not any fiat related features.

Following this, we sway a bit from centralization since its activities and operations are programmed on blockchain technology. For clarification, Crypto-collateralization helps to withstand market price fluctuations of its underlying digital assets.    However, since all its operations specifically happen on blockchain, its services depend on the uses of smart contracts.

c. Commodity-Collateralized Stablecoins:

Commodity-Collateralized stablecoins are the ones that are backed by a mix of several cryptocurrencies. However, since the volatility risk for a single cryptocurrency is high, these asset classes easily enable the distribution of the risk among them.

d. Non-Collateralized Stablecoins:

Here, the Non-collateralized stablecoins specifically depends on mathematics for algorithm operations. This stablecoin class mainly relies on smart contracts. Which helps to change supply volume and therefore maintains token prices.

For smart contract integration, this helps to sell tokens if the price falls below the peg price or whenever the token increases. By so doing, it maintains stability and holds its peg.

Usually, this type of stablecoins does not necessarily peg itself with fiat currency like the US dollar or gold. Hence, it  depends on the algorithms to maintain its peg survey. 

Its smart contracts are built on decentralized networks. Moreover, the Non-Collateralized stablecoins is capable of reducing and increasing  token supply in circulation based on the stablecoin price.

What Is the Best Stablecoin?

There are different kinds of stablecoins that are circulating around. Specifically, which ones are considered best? Find out here.

1. Tether (USDT)

Tether is considered a stablecoin. As a stablecoin, it is designed as a core asset between fiat-based currencies and cryptocurrencies. Also, Tether provides stability to digital assets, transparency, and reduces transaction fees.

Brock Pierce, Reeve Collins, and Craig Seller are the Co-Founders and CEOs of Tether. However, Tether was launched in 2014 in Santa Monica.

At the start, Tether was originally called “Realcoin”. Tether is the first digital currency to peg its market value to a fiat currency. At the time of writing, Tether had over $31.9 billion in market capitalization and about $118.82 billion in 24-hour trading volume.

2. True USD (TUSD)

True USD is a fiat-based collateralized stablecoin issued by the Trust Token platform. As an encrypted stablecoin, it safely keeps USD funds in an escrow account without direct access by Trust Token.

What is more, True USD is an ERC20 token. This means that it was created via the Ethereum blockchain network. It also entangles itself in a ratio of 1:1 with USD.

Launched in 2017. True USD is the first blockchain-based asset created on the Trust Token network. Founded by Rafael Cosman. True USD is a San Francisco-based Stablecoin that also has its headquarters in several countries like Canada, the US, etc.  

Currently, True USD has over $317,8 market capitalization with a 24-hour trading volume of $192,7 billion at the time of writing.

3. Paxos Standard (PAX)

Paxos Standard (PAX) is an ERC-20 stablecoin. This means it was created on the Ethereum blockchain. However, Paxos Standard has its headquarters in New York.

PAX was launched by Charles Cascarilla in 2012. As a stablecoin, it was approved to work by the New York State Department Financial Services. PAX functions as a native currency within the Paxos Standard ecosystem.

Concerning PAX market performance, Paxos Standard price was $0.996407. It holds a 24-hour trading volume of $156,380 at the time of writing.

4. USD Coin (USDC)

USD Coin (USDC) is a computerized stablecoin. It pegs itself to the United States Dollar on a 1:1 ratio through the Ethereum network. It was established in September 2018.

Also, USDC is an open-source and smart contract-based stablecoin that provides vast possibilities when it comes to payments. Brought by Circle, Bitman, and Coinbase. 

Based on CoinGecko data at the time of writing, USDC 24-hour trading was $2,110 along with a market capitalization of $7,289. 

5. Binance USD (BUSD)

BUSD stablecoin is backed and collateralized by the US dollar 1:1 ratio. It reduces volatility risks and enables users to do transactions with other blockchain-focused currencies anywhere at all times.

Perhaps, Binance partnered with Paxos Standard to launch BUSD. Founded in September 2017. BUSD stablecoin trades in pairs with BTC, BNB, and XRP via the Binance exchange.

BUSD is headquartered in Malta. Changpeng Zhao (CZ) is the chief executive officer behind BUSD. It has a market cap of over $1.718. Furthermore, BUSD holds a 24-hour volume of $4,92 in terms of trading.

6. Goldcoin

As we have already discussed above on other stablecoins, we saw that all of them were USD-pegged stablecoins.  Hence the name. Goldcoin is also another form of stablecoin which is fully backed by gold.

Besides, Goldcoin was created via the Ethereum blockchain. As we proceed, let’s consider answering this question. Why do lots of people have interest in buying Goldcoin to be precise over the traditional Gold?

With Goldcoin, you can easily buy without thinking about where to safely keep it. The Goldcoin company personally stores the gold in highly-secure vaults. For this reason, holding goldcoin arguably becomes even less risky.

7. DAI

Likewise Goldcoin, Dai is also a stablecoin within the cryptocurrency industry. It is a crypto-collateralized asset issued on the Ethereum network. However, the DAI stablecoin was created in 2014. Founded by Rune Christen.

DAI activities are specifically based on blockchain technology. For this reason, there is no interference from central organizations. At the time of writing, DAI’s market capitalization was about $2,383 with 24-hour trading volume of $359,448.

DAI has a Maker protocol. The protocol stabilizes DAI’s value via smart contracts by using Collateralized Debt positions (CDP).

8. StableUSD (USDS)

StableUSD (USDS) is a stablecoin launched by a crypto startup Stably. StableUSDS pegs itself to the US dollar in one-to-one ratio. However, this ratio is guaranteed to users whenever they purchase or exchange USD with Stably.

This is because Stably holds a one-to-one USD against all issued USDS within the crypto market.

Likewise the other stablecoins, StableUSD has different features from the fiat-collateralized stablecoins. It enables users to deposit digital assets like Bitcoin, USDT, and Ethereum, in exchange for USDS tokens.

StableUSDS was developed and launched by Kory Hoang.

Best Places to Buy Stablecoins

If you are thinking about where, how, and platforms to purchase stablecoins then worry not. Stablecoins can be bought via so many crypto exchanges. To mention a few, you can trade stablecoins on Binance, Coinbase, and Gemini exchanges.

Advantages of Stablecoins

Sparingly, stablecoins play a significant function within the blockchain space today. This has led to its wide uses and mainstream adoption.

a. Stablecoins enables seamless blockchain-based payments. b. It seamlessly maintains the project’s atlingh stability of a digital asset.
c. Stablecoins allows borderless payments
d. Has low fees
e. Stablecoins has a higher transparency rate
f. They have faster transactional times

How Do Stablecoins Make Money?

Since stablecoins try to maintain price stability always, interestingly, how do they also make money?

Let’s find out! 

Stablecoin investors possibly generate money by receiving dividends from newly created coins. These coins are then given to them to be able to hold stablecoins shares. Again, many investors hope that buying a “money-making machine” can help to issue new coins that they can easily sell.

Disadvantages of Stablecoin

Consequently, stablecoins do not only provide positive effects. Nevertheless, its advantages overtake the negatives. As it is always pegged with fiat money, automatically its structure turns to become centralized.  

Are Stablecoins Safe?

Stablecoins are safe to do hence the name. In terms of digital asset prices, stablecoins are more stable. Moreover, backed stablecoins have the same volatility features and risks associated with the backing asset.

As a result, stablecoins become stable whenever they are backed in a decentralized way. Hence, if there is a central vault, it may experience an external attack like a hack and many other insolvencies.

Future of Stablecoins

As already mentioned, looking at its potential, stablecoin has a good future. Crypto avails and well-time investors can do their investment-related activities using stablecoins. Hence stablecoins aim to overwhelm the crypto industry when we mention stability.

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Collins Adane is a writer who follows the crypto industry closely. He loves fish stew and Real Madrid. He believes in cryptocurrency’s potential to transform the money landscape in his native country Ghana.