Bitcoin, the first digital coin was created to replace the problems associated with fiat currencies such as huge differences between currency values and lack of universality. Now with more than 18,000 cryptocurrencies in existence, most businesses and governments are finding ways to fit them into their scheme of things.
Though understood to be the ideal money and way to transact, one of the most pressing issues that still prevent crypto from becoming the universally accepted currency is volatility.
These currencies are famous for changing valuation every few minutes. While this may be thrilling for short-term investors, it is not something that appeals to long-term investors.
Enter stablecoins!
They are one of the best solutions to combat the volatility issue of crypto with all the inherent advantages of digital currencies.
So, if stablecoins have gotten your interest too, here’s a quick guide to help you know everything there’s to know about them.
What Are Stablecoins?
A crucial indicator of money is its stability, something that’s lacking in crypto currently. Unlike the Dollar or Euro in your bank account or wallet that doesn’t change value frequently, cryptocurrencies do exactly that.
Stablecoins were created based on the theory that if digital currency is attached to a more stable regular fiat currency, it will have fewer price swings.
What Are The Different Kinds of Stablecoins?
Just like cryptocurrencies, not all stablecoins are created equal. While the majority of them are attached to the USD for stability, others have different stabilisation mechanisms. These include:
- Crypto-backed: Backed by other cryptocurrencies, they go by the logic that by moving them away from fiat currency, we do away with the hurdle of centralization and put everything on the blockchain. To make up for the inherent volatility of crypto, a larger number of crypto are reserved for issuing fewer stablecoins. Before you buy cryptocurrency in India, get to know the risks and modalities.
- Algorithmic: These are the stablecoins that use a particular algorithm, similar to central banks, to ensure stability. This mechanically-generated algorithm adjusts the demand and supply of the stablecoin.
- Fiat-backed: These stablecoins are backed by fiat currencies such as USD, Euro, and other currencies issued by the government. Their value is almost 1:1 to the fiat currency.
Which Are Some of The Best Stablecoins?
Here is a list of some of the leading stablecoins by market value:
- USDT (Tether): This is the world’s first stablecoin that was pegged to the USD price. It holds a significant portion of the trading volume and is used to trade against other cryptos such as Ether and Bitcoin. If you wish to buy USDT, get to know its current price and valuation.
- DAI: This is a leading crypto-backed stablecoin that is pegged with the USD in a 1:1 ratio. However, unlike other stablecoins, it doesn’t have USD in bank accounts. Its supply and demand are managed by smart contracts.
- USDC: This is the fastest-growing stablecoin that is also backed by the USD in a 1:1 ratio. It functions as a blockchain token that can be used for cross-border payments and as a store of value.
- BUSD: Binance USD is also backed by the USD in a 1:1 ratio. It is used in the DeFi markets for lending or borrowing and is available on the Ethereum Binance chain.
What Are The Benefits of Stablecoins?
Here are some advantages of stablecoins:
- They are a low-risk investment perfect for portfolio regulation and diversification.
- Stablecoins can be easily converted into fiat currency.
- They can be used to transfer large amounts of offshore funds due to their low volatility.
- They are less vulnerable to hacking since their collateral is not stored on the blockchains.
In the cryptosphere dominated by all the digital currencies and their inherent challenges, the importance of stablecoins will only increase with time. They have already been accepted by some of the major regulators around the world. To keep yourself updated about all the developments related to stablecoins, refer to Coinswitch.
