Businesses, start-ups, crypto-entrepreneurs, investors, and traders, who track the blockchain industry trends, must have heard the buzz around Stablecoins. For those not already familiar with the term Stablecoins are not anything else than an cryptocurrency. What is it, then, similar to bitcoin or other altcoin? Absolutely different, and that’s the reason it’s fascinating!
If it’s not like Bitcoin, then what is a Stablecoin?
When you think about bitcoin, what image comes to thoughts? If you’re a bitcoin advocate you can see endless possibilities however, the one who criticizes you will be aware of the problem of “volatility” that comes with Bitcoin and other cryptocurrencies.
Bitcoin offers you a short time frame to claim”I have the money to buy this item or since its value is fluctuating. It isn’t possible to be sure that it will keep its value. One day the value of it could purchase a car and the next what you can buy with it is two pizzas, as you can’t afford to buy pizza with. Laszlo Hanyecz, who became the talk of the town after trading 10,000 bitcoins for two pizzas from Papa John’s on May 22nd in 2010. In cryptocurrencies, the volatility is such that it is a raging flurry each day, is a snare and one of the major reasons why people are reluctant to accept the cryptocurrency.
It was discovered that the urgent need urgently needed was the development of a solution to combat the extreme volatility of cryptocurrencies and establish a secure financial structure for the cryptocurrency market, and so Stablecoins were created. The article below you will find out more information regarding Stable Coin and what are its applications in the real world.
What is StableCoin?
Like the name implies, the term “stablecoin” refers to a value that doesn’t change. It’s not as if it is completely stable however, it’s the same as fiat currencies, or other assets such as precious metals and gold.
Stable coins are designed to connect cryptocurrencies benefit and the steady nature of fiat currencies. It’s a cryptocurrency that is based on the cost of a national currency in order to reduce its volatile nature.
The question now is why we require a stable currency.
While cryptocurrencies are worldwide currencies, the coins such as Bitcoin as well as Ether are extremely volatile. The cost of Bitcoin went from $1000 up to $2000 in the year of 2017. Because it’s not sustainable, consumers and investors need more stability in the marketplace.
Imagine you are paying $30 today for dinner and the same amount could be worth $40 in the future because the price of the cryptocurrency token increased. Small investors can’t handle that type of fluctuation. Thus, stable coins came into existence as a novel method to facilitate the process to adopt cryptocurrencies.
It is possible to ask why we need to make fiat-backed crypto-tokens instead of simply using fiat currencies.
With this type that pegged, stabilizedcoin is able to adhere to the fundamental principles of cryptocurrency., i.e. it is not a part of any central bank. Decentralized currencies don’t require any central authority to build confidence in the system, thus reducing the additional cost involved. Stablecoin acts as an universal blockchain ledger suitable for paying for transactions that are tracked and verified without interference from any central bank or institution. It also offers the security and privacy advantages that come with cryptocurrencies, the security and transparency of blockchain, as well as the convenience of immediate processing, quicker speed as well as lower costs. It is unlimited borders.
What are the various types of StableCoins?
The value of the stable coin is secure because it is tied to a reserve asset, or in other words, the reserve asset is what is the one that backs it. It is based on what type reserve assets is backing the stability of a coin there are four kinds of stablecoins:
- Fiat-backed Stable Coins
- Non-collateralized Stable Coins
- Cryptocurrency-backed Stable Coins
- Commodity-collateralized Stable Coins
Fiat-backed
Fiat stablecoins that are backed by fiat are crypto tokens that are linked to their value in relation to a certain fiat currency. These tokens have their value at a 1:1 ratio.
For instance Tether is a stable coin, and it is tied 1:1 to US dollar. Fiat currency is used as collateral in order to guarantee that there is a stablecoin that is backed by fiat. Therefore, it needs financial custodian and periodic auditing to confirm that the token is secure.
Non-collateralized
Non-collateralized stablecoins have their roots in the idea of a Seigniorage Shares System. Seigniorage refers to the difference between the value of the currency and the cost of printing.
They are based on an algorithm that changes the quantity of supply in order to control their price. Utilizing smart contracts, these stable coins are traded when the price is lower than the pegged currency, and additional tokens are made available to the market in the event that their value increases above that of what is pegged.
Cryptocurrency-backed
Cryptocurrency-backed stable coins work similarly to that of a fiat-backed stablecoin. However, they lock up the cryptocurrency as collateral, in lieu of using fiat currencies. For example, Ethereum can be kept as collateral to create a cryptocurrency-backed stablecoin.
They use security guarantees to compensate with the fluctuation of crypto and serve as collateral. The stablecoin won’t be dependent on a 1:1 ratio for the collateral crypto.
For instance, if a cryptocurrency-backed stablecoin is pegged to the US dollar, it can be something around $2 peg for each $1 coin issued.
Commodity-collateralized
Commodity-collateralized stablecoins are backed by other types of interchangeable assets like real estate and precious metals. Gold is among the most commonly used commodities to be collateralized.
The stable coins that are backed by commodities represent the tangible property of actual worth. They can appreciate in value in time, providing more incentive for people to keep and use these coins.
Using commodity-collateralized stable coins, anyone can invest in real estate properties or precious metals across the world. Usually, investing in these investments is reserved for the most wealthy of investors. However, stablecoins offer the possibility of investing for everyone all over the world.
Read More : https://www.leewayhertz.com/stablecoin-guide/
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