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Bitcoin and other popular cryptocurrencies are highly volatile and investing in them carries high risks. Stablecoins help investors to reduce the level of volatility in the crypto market. We will describe further how they are created, by whom and why they are used.
What is a stablecoin?
A stablecoin is a cryptocurrency with a fixed or stable exchange rate. It is considered a universal unit for calculation, convenient for investing, holding and selling, protects the investor’s portfolio from risks in case of volatility of market trends and rates.
A stable cryptocurrency can be backed by various assets, the most common being those stablecoins pegged to the dollar. A striking example is the Tether coin, equivalent to one dollar. There are stablecoins backed by the euro, Stasis Euro. There are coins supported by the Singapore dollar – XSGD. There are also gold-backed assets on the market – these are PAX Gold and Tether Gold.
There are hundreds of stablecoins that, like other cryptocurrencies, can be used to earn money. For example, staking, investing assets on the exchange at interest.
What are stablecoins used for?
Top stablecoins are a liquid asset that can be bought on almost any large and popular platform among traders, in almost unlimited quantities. Coins are used as a universal crypt for the exchange and storage of a trader’s deposit. Stablecoins are easy to trade in pairs with another crypto, which cannot be said about fiat currency. Stablecoins are simply transferred from account to account, saving the user time.
In most cases, a stablecoin is used as a mechanism to protect against the high volatility of the cryptocurrency market, to preserve the investment portfolio and capital. This type of crypto is also often used in popular DeFi applications.
Types of stablecoins
Stablecoins are centralized and algorithmic. Most of the stablecoins in demand are projects of centralized issuers. Companies issuing this cryptocurrency manage funds, which include shares and other traditional assets. Such funds are constantly checked and audited. For example, Tether regularly publishes activity data on the official website, provides reports on the composition of its reserves, confirming the correspondence between the declared capitalization of the fund and the actual one.
The advantages of centralized stablecoins include stability, liquidity, ease of storage and settlement, placement as a base currency for trading pairs on cryptocurrency exchanges. The disadvantage of the asset is the centralization itself. If a company issuing stablecoins runs into difficulties, all owners of the asset have problems.
Algorithmic stablecoins are coins whose stability is provided not by traditional financial assets, but by cryptocurrency. Virtual asset prices are skyrocketing and falling, which makes securing the value of a stablecoin 100% challenging. The problem can be solved with the help of decentralized management and a software algorithm that maintains the price of an asset within a given value.
One of the ways to ensure the stability of an algorithmic stablecoin is the redundancy of the reserve, when the collateral is significantly higher than the issue of the coin. The Dai stablecoin was created according to this principle – the cryptocurrency is issued using the MakerDAO protocol. This coin can be called stable indeed, but it has a significant drawback, which manifests itself in low capital efficiency due to excessively high collateral.
Despite the fact that stablecoins are actively criticized by government departments and cryptocurrency market regulators, these assets remain popular and in demand among users, and experienced investors are helped to reduce risks for their portfolio and deposits. Learn more about stablecoins and other types of digital assets in the Crypto Crew community and in our training course. Grow in the cryptocurrency field, learn how to trade in practice and earn with minimal deposit risks!