What are stablecoins?

Cyptocurrencies are known for their volatility. This means that the prices of coins can rise and plummet abruptly, which makes it difficult for investors to zero down on a particular coin. However, stablecoin solves this issue.

Stablecoins are digital currencies that are usually backed by assets such as fiat currency, other cryptocurrencies or gold. The stable assets make these coins less susceptible to fluctuations and keep their prices stable. Certain stablecoins also use a computer algorithm to keep their value comparatively stable.

Stablecoins - DAI - USDT - TUSD - BUSD

How stablecoins work

  • Stablecoins are built to withstand volatility in a way that other cryptocurrencies aren’t For example, a U.S. dollars stablecoin is trying to have the exact same value as the U.S. dollar itself (as a fiat currency). Additionally, stablecoins usually offer mobility and accessibility. A stablecoin, however, is not backed by the government. This, inturn, grants it autonomy, but it also imposes a risk of loss.
  • Stablecoins allow for faster transfer than fiat money and provide privacy of financial data. Along with this, stablecoins also allows users to circumvent financial service fees.
  • Stablecoins are designed to stay in terms of value. This means that while they will not be a fall in value, it will not rise either. In contrast to a stablecoin, a crypto asset can rise thousands of percent.
  • Stablecoins behave like a form of digital cash. However, in spite of its stable nature, it is still a cryptocurrency. Therefore, it is still a newer entity that may have some undiscovered risks.
  • A cryptocurrency can be a dangerous option if you want to invest all or a large stake of your savings.

Types of stablecoins

Stablecoins are not backed by a government and are backed by:

  • fiat currencies,
  • crypto currencies,
  • commodities,
  • algorithms, or
  • a hybrid combination of these.

Widely known stablecoins are Tether (USDT), Dai (DAI), Binance USD (BUSD), TrueUSD (TUSD), USD Coin (USDC) and TerraUSD (UST). The world’s most popular stablecoin by market capitalization is USDT (78 billion U.S. dollars on January 8, 2022).