All You Need to Know About Stablecoins Cryptocurrency

For crypto traders and investors, the biggest challenge is the volatility of cryptocurrency. Big cryptocurrencies like Bitcoin and Ethereum have wide and unpredictable market price fluctuations. This makes it difficult to predict their value as the days go by. This is where stablecoins in cryptocurrency come in.

Stablecoins offer traders and investors a safe, low risk way to trade cryptocurrency. This is because they are not as volatile as other cryptocurrencies and they can easily predict their prices. Typically, they are backed by other stable cryptocurrencies or a fiat currency like the US dollar. By doing so, it helps to maintain their stability.

But what are stablecoins in cryptocurrency?

Stablecoins, by definition, are digital assets that are designed to maintain a stable value, typically pegged to a fiat currency or commodity. Therefore, they hold a significant market capitalization in the digital asset space. Unless one is entirely new to the crypto scene, stablecoins such as USDC are relatively common to crypto traders and investors.

These digital assets have become increasingly popular in recent years. With a total market cap of $203.624 billion (as at the time of this writing), they facilitate a lot of transactions daily.

In this guide, we will explore what stablecoins are and see their uses to crypto traders and investors.
Let’s dive in!

Types of stablecoins in cryptocurrency

There are several types of stablecoins that a particular asset backs. This uniqueness gives each stablecoin its own characteristics and individual advantage. The types of stablecoins commonly used in the crypto industry include:

Fiat-backed stablecoins

These types of stablecoins are backed by a reserve of fiat currencies or cash equivalents such as the US dollar or short-term treasury bills respectively. A regulated central financial institution holds them and aims to hold a 1:1 peg with fiat currencies. Just like other stablecoins, fiat-backed stablecoins combine transparency of blockchain technology and the stability of fiat currencies. This provides traders a cost effective and faster means of doing crypto related transactions in the market.

Amongst the types of stablecoins in cryptocurrency, fiat-backed stable coins are the most commonly used in the crypto market. They have larger market caps and have a seamless interaction with both centralized and decentralized platforms. Therefore, they reduce the operational hassle for investors and traders across these platforms. Here are examples of common fiat-backed stablecoins with their market cap.

• Tether (USDT)
  It is the largest US dollar pegged stablecoin in cryptocurrency by market cap and the third-largest cryptocurrency by market cap. It widely serves as a bridge to other stablecoins between chains as investors can use it across 14 different blockchains.
• USDC (USDC)
  USDC is the second largest stablecoin in cryptocurrency by market cap. It was launched in 2018 and holds a 1:1 peg with the US dollar. It serves as a collateral in decentralized finance and traders use it to trade on centralized platforms.
• Stasis Euro (EURS)
  This is the largest stablecoin that holds a peg to the Euro by market cap. Liquid Euro balances, which are stored in central bank accounts, backs it up completely.
• Euro Coin (EUROC)
  EUROC is also a Euro pegged stablecoin. The same company that created the USDC issues it but it has less than 0.5% volume of USDC.

Other examples include TrueUSD (TUSD), Tether Euro (EURT), Paxos USD (USDP) and so on.

Crypto-backed stablecoins

Unlike fiat-backed stablecoins, crypto-backed stablecoins are backed by a reserve of other cryptocurrencies. Therefore, they use other crypto assets as collateral to maintain their value. They also use blockchain technology and smart contracts to effectively manage the stability of their value, thus, minimizing volatility. They also rely on over-collaterization. This means that the value of the crypto asset held in reserves is greater that of the stablecoin issued.

Over-collaterization helps to safeguard the price of the stablecoin even when there is a serious drop in the price of the collateral. An example of common crypto-backed stablecoin is Dai (DAI). Smart contracts maintains DAI within the MakerDAO protocol, and ETH backs it.

Commodity-pegged stablecoins

These stablecoins are pegged to a reserve of physical assets like gold, silver, oil or other tangible commodities. Their value is tied to the value of other commodities, as a result, they offer users exposure to these commodities without actually owning them. Examples of common commodity pegged stablecoins include:

• PAX Gold (PAXG): It is backed by gold reserves. As such, each token is a representation of one troy ounce of gold reserve. It is one of the most popular gold-backed stablecoins with a market cap of $528.85 million
• Tether Gold (XAUt): like PAXG, it similarly provides gold backed stability. Rumour has it that an unknown custodian holds the gold in Switzerland.

Benefits of stablecoin in cryptocurrency

Stablecoins offer a lot of benefits to both investors and traders alike. These benefits include:

• Stability: Their design is to maintain a stable value, and as such, they are a safe investment for investors.
• Low risk: They are typically backed by a reserve of assets. Therefore, there is a maintenance of their stability which reduces volatility.
• Liquidity: They provide liquidity in cryptocurrency markets. As a result, they allow traders to buy and sell cryptocurrencies quickly and efficiently.

Conclusion

Ever since their emergence into crypto markets, they have become increasingly popular. This is because they offer a friendly and safe alternative to traditional cryptocurrencies. The price fluctuations with stablecoins in cryptocurrency are low and are often predictable, making them a better option for investors and traders navigating the volatile landscape of cryptocurrency.
As the crypto market continues to evolve and technologies advance, we are sure to see more uses of stablecoins outside trading. Therefore, understanding the concept of stablecoins is essential for traders and investors especially as the demand for these digital assets continue to increase daily.

For more updates, visit our WEBSITE today.