It is not uncommon for money to fluctuate and be unpredictable in its value. It can rise and fall in one day, or vice versa. The strength or weakness of an economy will usually determine the currency’s value. Unfortunately, this uncertainty can cause wealth to be at risk.
Investors typically use precious metals, exclusive property, and other valuable assets to preserve their wealth. A stablecoin, however, is an excellent way to protect yourself against potential losses.
What’s A Stablecoin?
Stablecoins are another type of cryptocurrency or digital token that attempts to replicate or peg its market price to an asset or reference. Its value can be tied to commodities such as gold, oil, or gas, or the value of government-issued money, like US dollars, euro, and yen.
Stablecoins are a form of cryptocurrency that runs its programs and operations using blockchain technology. They aim to perform the same functions as traditional money and digital assets. These can also be used to make payments. They are classified as payment tokens, which can be used as a store of value, medium of exchange, and unit of account.
Some of the most well-known stablecoins are Tether (USDT), Dai, USD Coin (USDC), TrueUSD(TUSD), Paxos Standard (PAXOS), and many more.
Stablecoins, however, are not susceptible to inflation like fiat currencies and other cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), and others. They are designed to preserve their value and achieve price stability. There are four ways to achieve this.
How Do Stablecoins Work?
Stablecoins use different methods to fix their values to bridge the gap between fiat currency and cryptocurrency’s price stability. Let’s look at the four types.
1. Fiat-collateralized stablecoins
This stablecoin can be backed by an existing currency such as the United States Dollar (USD), which is often in a 1:1 ratio. You can use equivalent fiat money as collateral to secure every digital coin you receive. Tether (USDT) is a good example. 1 USDT is always worth 1 USD.
Fiat-backed stablecoins remain the most widely used stablecoin type in today’s crypto world. It is vulnerable to fraud, however, because it is issued by central groups and entities that have their own rules and protocols. It is important to find an issuer that you trust.
2. Commodity-collateralized stablecoins
These stablecoins can be compared to fiat-backed coins but instead of using fiat money, they use other types of interchangeable assets or goods as collateral. These can include precious metals like gold, silver, and diamonds, as well as valuable commodities such as oil and natural gas. Petromoneda, Venezuela’s cryptocurrency backed by oil, is a good example. It cannot be traded internationally and has not gained any traction in Venezuela.
3. Cryptocurrency-collateralized stablecoins
Instead of using fiat money, stablecoin can be backed by cryptocurrency. The entire process is decentralized because it uses cryptocurrency as collateral. Often, crypto-collateralized stablecoins are pegged with a 1:2 ratio.
Due to the volatility of cryptocurrencies, more coins will be used as collateral for each stablecoin. So, price fluctuations won’t affect the supply of stablecoins. Dai (DAI) is an example of such a stablecoin. It is backed on the Maker platform by collateral.
This isn’t popular because of the complexity of cryptocurrency. Also, because of the high amount held as reserves, it’s often referred to as “over-collateralized. ”
4. Algorithmic stablecoins
These stablecoins, also known as non-collateralized are not backed by fiat money or cryptocurrency. They maintain stability via an algorithm or other working mechanism. Smart contracts manage the supply and demand system and ensure stablecoin’s price stability.
If the stabilitycoin trades too high, the algorithmic system will create new coins. To reduce its circulating supply, the algorithmic system will purchase coins on the market. Primecoin (XPM), and the now-defunct Basis are two examples. Although this seems to be the most complex of the four, the algorithmic system is very similar to central bank processes for managing supply.
Why Are Stablecoins Important?
Stablecoins, like other cryptocurrencies, also seek to offer developed functions of traditional money around the globe. Let’s look at some of the significant benefits they offer.
1. Stability in the price
Stablecoins have a fixed value that can be maintained over time. Many crypto investors and enthusiasts consider stablecoins a safe-haven asset. Stablecoins can be volatile and subject to sudden drops and spikes in value. This is why they are a great option for those looking to protect their wealth. You can keep your wealth as an asset and not be at risk from inflation.
2. Privacy and decentralization
Stablecoins can be considered a cryptocurrency. They have the same technology and features that make Bitcoin and other digital assets the most secure. They operate on a blockchain that prevents hackers and double-spending and allows the network to be decentralized.
3. Programmable currency
Because they are “fundamentally composed of code”, stablecoins can be programmed and customized to meet the needs of their users. This can be implemented in a variety of ways, including loyalty and rewards programs. A company can build a program that uses its stablecoin to create an app where users can quickly and easily check their rewards and stablecoin.
Most Popular Stablecoins Currently on the Market
Now you’re familiar with what they do and how they work let’s dive deeper into this list of stablecoins that many people use today:
Tether, as the name implies, is a stablecoin whose value is tied to the US Dollar (1 USD = 1 USDT). It currently ranks at #3 among all cryptocurrencies on the market.
Value: 1.00 USD
Market cap: 82,557,675,749 USD
Maintained by MakerDAO and regulated by MakerDAO. Dai, an Ethereum-based stablecoin, also pegs to the US Dollar through collateralized Debt. Its reserves are not held in US Dollars, but in collateralized debt in Ethereum (ETH).
Value: 0.9993 USD
Market cap: 9,401,706,542 USD
USD Coin (USDC)
USD Coin is a stablecoin fully backed in US Dollars (USDC). It’s a fiat-collateralized currency that’s pegged at USD.
Value: 0.9993 USD
Market cap: 50,960,698,150 USD
True USD (TUSD)
True USD, like other examples in this list, is a fully collateralized stablecoin that has been verified by the Ethereum network. It also fixes its value to US Dollars and maintains a 1:1 ratio, as most stablecoins do.
Value: 0.9994 USD
Market cap: 1,345,160,168 USD
Pax Dollar (USDP)
It was originally traded under the PAX ticker. Later, the Paxos team rebranded it to Pax Dollar (USDP). It is also built on the Ethereum blockchain and maintains a 1:1 relationship with USD.
Value: 1.00 USD
Market cap: 946,559,515 USD
Why Does Stablecoins Work Well with Bitcoin?
Stablecoins are attractive to those who want to preserve their money’s value because they can be maintained at price. When you combine them with a popular cryptocurrency such as Bitcoin, the real potential of each is unleashed. You get the best of both: real-world use cases and investment opportunities with Bitcoin, as well as stability with stablecoins such as Tether.