Stablecoins – What are They? How Do They Work?

Stablecoin is a form of crypto whose worth is pegged onto an alternative asset, e.g., fiat currency or gold, to alleviate its value. Some cryptocurrencies provide several benefits, and the most renowned benefit is that it doesn’t need a central organisation to shoot outflows, which makes their use worldwide. However, crypto’s crucial debit is that crypto prices fluctuate frequently.

Therefore, it is difficult for these assets to be used by the public. Typically, people want to know how much money they have to enable them to make financial decisions daily. The unpredictability nature of crypto is in contrast to the price stability enjoyed by money. Value currency, e.g., the American dollar, is also affected by value changes but not as much as cryptocurrencies.

Stablecoin Overview

Stablecoin attempt to attack value oscillations by securing the value of crypto to steady supplementary means – generally fiat monies. Fiat is a currency that the government has issued, and it is used daily. Examples include the United States dollar, Sterling pounds and the Euros.

Generally, the reality propelling Stablecoin will comprise a” reserve “where it steadily stores the asset or handbasket of means supporting Stablecoin. They are pegged to tangible- world assets. Whenever a Stablecoin holder wants to withdraw their assets, the total worth of the withdrawn assets is subtracted from standby cash in reserve.

An intricate type of Stablecoin is collateralised using cryptos other than the fiat currencies, but it is still contrived to track a conventional asset.

Maker is a renowned Stablecoin supplier that uses this medium and achieves this milestone using the “Vault”, which locks up a holder’s crypto security. As soon as the intelligent contract proves that the guarantee is in place, the contract allows it eligible for the holder to be loaned DAI.

Algorithmic Stablecoin is another variety of stablecoin. It is not collateralised. They are either burned or formed in order to preserve the coin’s worth.

Categories of Stablecoin Collateral

  • Fiat: It is the most common collateral for Stablecoin; the most popular being the U.S dollar.
  • Precious metals: Some cryptocurrencies are pegged on precious metals, e.g., gold & Silver.
  • Cryptocurrencies Some Stablecoin use the likes of ether Ethereum’s network native coin as security.

Common Stablecoins

  • Tether (USDT): Tether is one of the most widely used stablecoins, pegged to the value of the US dollar. It is known for its high liquidity and is extensively used for trading and transactions within the crypto space.
  • USD Coin (USDC): USDC is another major stablecoin pegged to the US dollar and is supported by several major cryptocurrency exchanges. It’s known for its transparency and regulatory compliance.
  • DAI: DAI is unique compared to other stablecoins as it is decentralized and maintains its value by using smart contracts and collateral on the Ethereum blockchain. It is not pegged to a specific fiat currency but aims to keep its value stable around $1 USD.
  • Binance USD (BUSD): Binance USD is a stablecoin issued by Binance and pegged to the US dollar. It’s backed by reserves of US dollars held by Paxos Trust Company.
  • TrueUSD (TUSD): TrueUSD is a USD-backed stablecoin that operates similarly to USDC and USDT, aiming to provide stability and transparency through regular audits and a reserve-backed system.
  • Paxos Standard (PAX): Paxos Standard is a regulated USD-backed stablecoin issued by Paxos Trust Company. It’s designed to be fully collateralized by US dollars held in FDIC-insured banks.
  • HUSD: HUSD is an ERC-20 stablecoin that is backed by multiple stablecoins, aiming to provide users with a diversified and balanced portfolio.

Finally, there are some drawbacks to stablecoins, mainly due to the nature in which they are generally set up. Hence have different challenges compared to other cryptocurrencies. Crypto was designed to substitute third-party firms in charge of users’ cash. These third-party firms can block certain transactions from happening. However, some stablecoin also can block certain transactions.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.