Cryptocurrency

What are Stablecoins and what are they for

Cryptocurrencies like Bitcoin or Ethereum have been very popular until the massive waves of volatility scared away potential participants. Stablecoins have become the way out for these people.

What are Stablecoins

Stablecoins are cryptocurrencies whose market value is pegged, or tied, to another asset with a stable price: for example, to a currency like USD or a commodity like gold. Stablecoins can also be backed by a cryptocurrency or an algorithm.We will compare popular stabelcoins in this article.

Why are they so important

Bitcoin (BTC) and other cryptocurrencies experience high volatility in their price both long-term and intraday. While stablecoins with a pegged value provide stability in a shaky market and grant an alternative to the high-volatile cryptocurrencies. Stablecoins backed with a stable asset are less volatile and safer so they give both investors and traders ‘risk-off’ keeping within the crypto space with high transactional speed on blockchains.

As stablecoins allow a safe space, more volume occurs in the cryptomarket, which proportionally affects liquidity, making the market more quicker and efficient, the asset prices fairer and bid & ask spreads tighter.

What Stablecoins are backed by

Here are three major types of stablecoins identified by the asset that backs them.

Stablecoins with fiat backing

Stablecoins backed by fiat currencies keep as collateral a reserve of a specific currency — mostly USD. Its reserves are controlled by independent custodians and often audited.

Stablecoins also can be backed by fiat metals or commodities such as corn, crude oil, or real estate, but in most cases – by gold.

Stablecoins backed by cryptocurrency

Such stablecoins are backed by other cryptos and overcollateralized to mitigate risks caused by reserve crypto’s high volatility. It means that instead of keeping a 1-to-1 ratio the reserve crypto’s value exceeds the issued stablecoins’ value, for example, $1 million cryptos against $500k stablecoins.

Algorithmic Stablecoins

Such stablecoins are backed by an algorithm rather than some asset. It aims to keep the stablecoin’s value stable not by relying on a reserve asset but by controlling its supply via an algorithm running a preset formula and smart contracts evolved on decentralized platforms.

Popular Stablecoins

The most well-anchored and safe stablecoins are backed by USD. Here are the TOP of them.

Tether (USDT)

Tether (USDT) https://trends.aax.com/how-to-buy-and-sell-tether  is the most famous stablecoin on the cryptomarket with the highest volume and capitalization. As of summer 2022, it was minted on ten protocols and blockchains. Tether is tied to USD at a 1:1 ratio and is boasting about its steadity and security.

USD Coin (USDC)

USD Coin (USDC) is a stablecoin tied to the U. S. dollar and is built on Ethereum (ERC20) protocol. It is managed by Circle, one of the world’s most trusted crypto companies, and includes members from one of the biggest crypto exchanges Coinbase, and Bitcoin mining company Bitmain. USDC is also trustworthy due to publishing regular audit reports by independent accounting services.

Binance USD (BUSD)

Binance USD (BUSD) is backed by crypto exchange Binance, tied at a 1:1 ratio to the USD, issued as ERC-20, and supports BEP-2. It is aimed to meld the stability of the dollar with blockchain technology. BUSD is also regulated and audited by the NYDFS.

DAI, UST, and other coins

There are some other popular decentralized algorithmic stablecoins:

  • DAI, formerly SAI, is a cryptocurrency-backed stablecoin on the Ethereum blockchain issued by MakerDAO. It aims to keep its value as close to 1 USD as possible via smart contracts.
  • TerraUSD (UST) is hosted by the Terra network and pegged to key currencies. It aims to maintain the value of $1 through a “mint/burn” mechanism. The algorithm employs Terra’s governance token LUNA.

In total there are approximately 200 stablecoins today, distributed globally. For example, Gemini Dollar (GUSD) and Paxos Standard (PAX), are two stablecoins built on the Ethereum (ETH) blockchain and backed by USD at a 1:1 ratio, also regulated by the NYDFS.

Angela Scott-Briggs

Editor, TechBullion.com | Interested in Innovations in Business, Finance, and Technology .

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Angela Scott-Briggs

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