A stablecoin is a crypto asset with very low volatility. They are sometimes utilized to have portfolio diversification. Their examples take into account fiat-pegged or gold-backed crypto tokens. Stablecoins are known as cryptocurrencies that have a static value and are normally pegged to a fiat currency (such as the U.S. dollar), more than one currency, or even exchange-traded commodities like precious metals.
Stablecoins play a significant role in eliminating price volatility across the crypto markets. An underlying asset, usually the one being represented by them, is used to collateralize stablecoins to offer price stability just like the fiat currencies. Tether (USDT) and other such stablecoins are supported on the behalf of the USD with a ratio of 1:1. For each USDT unit in circulation, one dollar is separated and kept by the issuer Tether Ltd in reserve. This reserve is administered on the behalf of the founders of Bitfinex (the prominent crypto exchange).
Types of Stablecoins
In some of the previous years, the quantity, as well as the number of these stablecoin currencies, has witnessed a huge expansion. Many crypto assets are also pegged to traditional currencies other than the United States dollar like the euro or even the rest of the crypto assets. Keeping a broad scenario in mind, stablecoins have up to four types which are discussed below.
1st type of stablecoins takes into account the cryptocurrencies that are fiat-collateralized. These include BUSD, USDC, USDT, and several others. The 2nd deals with commodity-collateralized stablecoins. They take into account DigixGlobal (a gold-backed crypto token). The third stablecoin type refers to crypto-collateralized stablecoins. The Dai token of MakerDAO is an adequate example of these stablecoins. The fourth stablecoin type comprises the non-collateralized stablecoins. They depend on an algorithm mechanism and Seigniorage Shares system to maintain their peg.
Use Cases of Stablecoins
It appears that the use cases of the stablecoins are boundless. A few of the projects dealing with stablecoins have linked their digital value to some cryptocurrencies or precious metals. The Libra (presently called Diem) project of Facebook (now Meta) – that has been unsuccessful – and other such programs permit the stablecoin currencies to play the role of the exchange medium. They are supported by diverse national currencies at the same time.
It is very convenient to purchase stablecoins and the majority of the crypto exchange platforms, including the well-known Coinbase and Binance, list them. Shortly, they offer proper liquidity in addition to the provision of a secure place for those who invest in crypto. At the moment, stablecoins have become an inevitable section of the overall world of digital assets.
Though – for a considerable period – the rumors have been reported that proper regulations would shortly be devised to cope with the sector of stablecoins, governments and authorities across the globe are still tolerating these assets as they strictly abide by the financial legislative needs. Stablecoins are the assets responsible for inspiring the creation of the central bank digital currencies (CBDCs).