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Stablecoins: An Overview of the Entire System

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Since the introduction of the very first cryptocurrency, Bitcoin, in 2009 by Satoshi Nakamoto, there has been a flurry of activity in the cryptocurrency arena. Developers have been trying to create new coins with special inputs and features in an attempt to offer a better version of the original cryptocurrency. Though the Bitcoin frenzy has caught up in the last five years, even in its initial years when the response to the cryptocurrency was rather insipid, developers looked for ways and means to design a coin that had the answers to all the lacunae in Bitcoin. For more details click at this link https://bitindexai.top/

Alternative to Bitcoin

The first coin that was developed just two years after the introduction of Bitcoin was Namecoin and from then on, thousands of new coins have been introduced in the crypto market. While many have successfully created a niche for themselves as potential investment options, most of them have fizzled out without a trace. Today, a new coin is being created almost every day.

The need for a more stable cryptocurrency

However, one common drawback that was found in all the cryptocurrencies was that they are all highly volatile entities. The surges and the plunges in their prices are too frequent thus, making them unstable. Detractors of cryptocurrencies questioned their ability to survive in the long term. It is important for a currency that is also used as a medium of exchange to be comparatively stable and must not experience random and too-frequent swings. This is to ensure the seller who accepts the currency in exchange for goods and services that the purchasing power of the currency remains the same.

To address this major cause of concern among cryptocurrency users, a new type of crypto coin, a stablecoin was developed. As the name suggests, a stablecoin was designed to be pegged to a fiat currency or a commodity, mostly the U.S dollar that ensured that it maintains a fixed value and unlike the other crypto coins does not experience intense fluctuations. This makes it more viable to use as a medium of exchange.

What are stablecoins?

Stablecoins were created as a bridge between digital currency and fiat currency wherein their price was linked to a reserve asset to provide this cryptocurrency the much-needed stability. Hence, they are termed stablecoins. So, a stablecoin pegged to the U.S dollar will always be valued at $1. The price fluctuations which brings in volatility in the entire bitcoin trade market also gets removed from the system of the investor due to the fact that the price of stablecoins goes up with increasing rate of Dollar and goes down with the same, which is very rare. Thus, if you are afraid of the volatile nature of crypto trade market, then you can get your hands on the Stablecoins now.

Types of stablecoins

Based on the method the cryptocurrency employs to stabilize its value, stablecoins can be broadly classified into several types:

  • Fiat-collateral stablecoins

The most widely-accepted stablecoins are backed by a fiat currency in the ratio of 1:1. The fiat collateral remains in reserve with a centralized financial institution and must tally with the number of the coins that are in circulation in the crypto market. For example, if a stablecoin issuer has a reserve of $1 million of fiat currency, he is authorized to circulate the same number of coins as the fiat currency value, i.e., 1 million stablecoins in the market, and the value of each coin will be $1. Since these coins have fiat collateral and not another cryptocurrency as their underlying collateral, they are regarded as off-chain assets.

  • Crypto-collateralized stablecoins

Unlike fiat collateral, these coins have cryptocurrency as their collateral and hence are considered on-chain assets. Smart contracts are employed in the purchase of these stablecoins as you need to lock the crypto coins into a smart contract and will receive coins of the same value. Similarly, at the time of withdrawal of your collateral amount, you can use the same smart contract.

  • Algorithmic stablecoins

Instead of using traditional or digital currency as collateral, these stablecoins employ specialized algorithms and smart contracts that regulate the number of coins that are in circulation in the crypto market.

Popular stablecoins

In recent times, many stablecoins have been introduced in the crypto market but all of them do not fare well. So, you must know which coins have established themselves as the coins of the future with maximum potential. They are:

  1. Tether
  2. USDC
  3. BNB
  4. TUSD
  5. PAX

Conclusion

If you are keen on investing in cryptocurrency but are wary of the rapid fluctuations in their value due to high volatility, the best option for you is the stablecoins that you can easily buy from a reputed crypto exchange or trading app such as Bitcoin Circuit app that has helped hundreds of investors. Stablecoins offer the benefits of digital currency while being relatively stable.

Based in LA, Alice Blake is a senior reporter for Kivo Daily. She primarily covers entrepreneurs.

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