What are Stablecoins and how do they work?

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Stablecoins are digital currencies backed by secure assets such as the US Dollars, fiat currencies, other cryptocurrencies, or gold. As a result, their values are stable. These coins’ prices remain consistent due to their stable assets, which make them less sensitive to price changes. A computer program is also used by certain stablecoins to keep their value relatively stable.

What are Stablecoins?

Stablecoins are a type of cryptocurrency designed to provide greater stability than other cryptocurrencies. Some are backed by a reserve of the asset they represent, while others rely on algorithms or other techniques to keep their values stable.

How do stablecoins work?

  • Endurance to Volatility: Stablecoins have the advantage of being constructed to endure volatility in a way that other cryptocurrencies are not. They can also provide mobility and accessibility. It is a more stable and decentralized cryptocurrency. This means that it is not a part of a centralized system or organization. As a result, it gains autonomy.
  • Ease of Movement of Money: Stablecoins are popular with investors for a variety of additional reasons. It enables for speedier movement of money and offers anonymity of financial data. Stablecoins also help consumers to avoid paying fees for financial services.
  • Stable Value: Stablecoins differ from other crypto assets in various ways. In terms of value, they’re made to stay put. This indicates that, while there will be no decrease in value, there will also be no increase. When comparing the USD coin to the Bitcoin coin, this becomes clear. The value of the US dollar coin has hardly changed since its introduction. In 2019, Bitcoin was worth $4,000, and by May 2021, it was worth $60,000.
  • Unkown Risks: Stablecoins should be considered as a sort of digital cash. It is, nevertheless, still a cryptocurrency, despite its stability. As a result, it is still a relatively new entity with unknown risks. If you wish to put all of your savings in cryptocurrency, it can be a risky alternative. Approach stablecoins with an open mind and a desire to learn more about them. Stablecoins can also be used as a starting step towards investing in cryptocurrencies.

Types of stablecoins

Stablecoins come in a variety of shapes and sizes, depending on the asset that backs them and gives them some semblance of stability. These are the sorts of stablecoins that are currently accessible, according to Benzinga: Commodity-Backed Stablecoins, Cryptocurrency-Backed stablecoins, Fiat-backed Stablecoins, and Seigniorage-Style Stablecoins are examples:

1. Seigniorage-Style Stablecoins

Stablecoins of the seigniorage form, also known as algorithmic stablecoins or non-collateralized stablecoins, are ones whose prices are kept stable by an algorithm, a process, or even a working mechanis.

2. Commodity-Backed Stablecoins

According to Benzinga, commodity-backed stablecoins are “stabilized by physical assets such as gold or real estate.” Commodity-backed stablecoins are frequently made of gold, but other metals have also been employed. Examples of commodity-backed stablecoins include Tether Gold and Paxos Gold.

3. Cryptocurrency-Backed Stablecoins

In addition, cryptocurrency can be used to back up other cryptocurrencies. The quantity of this type of stablecoin is usually low. Wrapped Bitcoin is an example of a cryptocurrency-backed stablecoin.

4. Fiat-Backed Stablecoins

Stablecoins that are backed by fiat currencies, such as the US dollar, are known as fiat-backed stablecoins. Precious metals like silver and platinum, according to Benzinga, can also be deemed fiat. Examples of fiat-backed stablecoins are the USD Coin and Tether. The prices of both are based on the US Dollar.

How Safe are Stablecoins?

Usually Stablecoins are safer than other variant of cryptocurrencies. Stablecoins are appealing because they are designed to survive volatility in a manner that other cryptocurrencies are not, while still maintaining mobility and accessibility. A more stable cryptocurrency is still decentralized, which means it isn’t bound by centralized laws and regulations. This opens the door to the world of DeFi, with benefits such as speedier money transfers, access to financial services without the need for apps, the privacy of financial data, and the avoidance of financial service costs. Stablecoins with a centralized backing provide a digital choice backed by a traditional currency.

List of top 10 Stablecoins

According to CoinMarketCap, a cryptocurrency statistics and analytics firm, these are the Top 10 Trading Stablecoins by Market Capitalization.

CryptocurrencyHighest Market Capitalisation 2022
Tether$78 Billion
USD Coin$51.7 Billion
Binance coin$17.3 Billion
TerraUSD$11.3 Bilion
Dai$10.2 Billion
TrueUSD$1.5 Billion
Pax Dollar$946.1 Million
Neutrino USD$447.7 Million
Fei USD$423.7 Million
Tribe$331.6 Million
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