As the name suggests, a stable coin is a coin that doesn’t fluctuate too much like other cryptocurrencies. In fact, these coins successfully maintain a fixed value in the long run. The reason why these coins don’t fluctuate a lot is that they are pegged to a physical asset.
These assets are usually in the form of US Dollars. But they can also be in the form of bonds, gold, or other assets. Usually, these coins are backed by real currency. And the organization, that is holding these assets, releases 1 Unit of the cryptocurrency for 1 Unit of the real currency.
What are the Most Common Stable coins in Crypto?
Stablecoins don’t provide an opportunity to become rich quickly. Therefore, they don’t get as much hype as other cryptocurrencies. Although there are a number of stablecoins in the crypto market, Tether (USDT), USD Coin (USDC), and TerraUSD (UST) are the most common stablecoins people use for different purposes.
Tether (USDT) has a circulating supply of 72 billion units. And it’s the most popular stablecoin used for trading cryptocurrencies. USD Coin (USDC) has a circulating supply of 37 billion coins and it’s best known for its low trading fee. TerraUSD (UST) only has a circulating supply of 3 billion coins because it was launched just a year ago in September 2020. So, it will take some time to establish its reputation.
There’s a misconception among crypto investors that Tether is backed by the U.S government. But the senior investors understand that it’s not the truth. Tether was actually launched by Tether Holdings Ltd in 2014. This organization is responsible for maintaining the physical assets depending on the number of digital coins issued.
How Do Stablecoins Work?
The stablecoins are managed by independent accounting firms that hold a physical asset for each stablecoin released or we can say that stablecoins are the digital form of the physical asset held by that firm. Usually, these organizations keep their physical assets stored in reputable financial institutions.
So, if the organization has $50 million in reserves, it can issue 50 million digital coins of the same value. Normally, the organizations hold physical assets in the form of US Dollars. Thus, the stablecoins maintain the value of $1 in the long run. The buyer can pay fiat currency to the financial institution to get the digital currency of the same value.
They can then use these stablecoins to buy other cryptocurrencies or they can hold these coins in their wallets as long as they want. The businesses can also use stablecoins to execute smart contracts on Ethereum and other relevant blockchains. The buyers can also receive the fiat currency in their regular bank account by returning the digital coins to the issuing authority.
However, there are other types of stablecoins recognized as algorithmic stablecoins that successfully maintain the same value over time but aren’t backed by physical assets. The issuing authorities maintain the value of these coins by destroying/burning a few coins after some time.
Why Stablecoins are Important?
Stablecoins are open-source digital coins that are easily accessible to anyone in the world. These coins are considered better than other cryptocurrencies because they don’t fluctuate too much. They’re used to transfer money from one entity to another quickly and securely. Here are some aspects that describe the importance of stablecoins.
Minimize Volatility
The Crypto market is extremely volatile where investors can instantly lose their money if the portfolio isn’t properly managed. Some investors don’t have enough time to check their wallets every day. The stablecoins appear to be a great option for these investors as they significantly minimize volatility which ultimately reduces the risks of losing money.
Trade or Save Assets
One of the major reasons why most people like blockchain technology is that they can transfer money internationally without having to deal with a centralized authority. The problem with other cryptocurrencies is that their value changes every second. However, stablecoins maintain the same value over time.
Thus, investors don’t need to worry about the value of their assets no matter how long they’re kept in the digital wallet. They can also buy products/services from suppliers at a certain price value without worrying about the price fluctuations of cryptocurrencies.
Earn Interest
Normally, people keep their savings in the bank account to earn some interest on it. The stablecoins are appearing to be a better alternative because they’re offering better interest rates than the local banks. The investors can fix these assets for their desired period of time and then redeem them whenever they want.
Cheap Transactions
One of the most important benefits of stablecoins is that the users have to pay only $1 for a transaction even if the transaction’s size is 1 million dollars. The best part is that they can transfer amounts to anyone in the world by following a simple transaction process.
Risks Associated with Stablecoins
The stablecoins aren’t completely risk-free. There are some risks associated with these coins. The users are supposed to store their coins in a digital wallet or an exchange. They have a risk of losing their money if the platform is hacked.
Similarly, the issuing authority can only guarantee a certain value of the coin if they have equal reserves available in the bank or any other financial institution.
So, it’s important to consider these risks if you’re planning to invest in stablecoins.
Conclusion
Stablecoins are a bridge between fiat currency and cryptocurrency. In most countries, people can’t buy cryptos directly through fiat currency. In this situation, stablecoins enable them to transfer funds from their local bank to a crypto exchange/wallet. The stablecoins are backed by the physical assets due to which they successfully maintain their value over time.
In most categories, stablecoins are better than other cryptocurrencies and fiat currency as well. But one should also consider the risks associated with these coins.