What is Stablecoin?
Stablecoins are a cryptocurrency whose value is fixed or tied to that of another currency. Its primary goal is to provide an alternative to the significant unstableness of the most famous cryptocurrencies, such as Bitcoin, making crypto investments less fitting for basic transactions. Stablecoins are after price stability through maintenance of reserve assets as collateral or using algorithmic formulas for controlling supply.
There are a few types of stablecoins according to the mechanism used in stabilizing their value.
Fiat-collateralized stablecoins maintain reserves of fiat currencies, like the US dollar. They utilize it as collaterals to ensure their value. Some forms of collateral can involve precious metals such as gold or silver. It can also include commodities like crude oil. However, most fiat-collateralized stablecoins have US dollar reserves.
Crypto-collateralized stablecoins are supported by other cryptocurrencies. However, since reserve cryptocurrencies are at risk of high volatility, such stablecoins may be overcollateralized, meaning the crypto’s value within the reserves is more than the value of the issued stablecoins.
Algorithmic stablecoins may hold reserve assets or not. Its main distinction is its strategy of maintaining the stability of the stablecoin’s value by controlling its supply with an algorithm, usually by a computer program with a preset formula.
Most cryptocurrencies’ value is widely determined by what the market will bear. Also, several people who buy them hope they will increase value. Meanwhile, stablecoins are made, so they will not change much in value. So, if you ever spend a stablecoin linked to a dollar’s value, you are less likely to watch over the crypto’s prices the following week.
Many are interested in stablecoins because they are built to handle volatility in a way that other cryptocurrencies cannot. Moreover, centralized stablecoins offer a digital option with the backing of traditional currencies.
On the other hand, despite being less volatile, they still use newer technology that can possess unknown bugs or vulnerabilities. Plus, there is always a possibility of losing private keys that give you access to your cryptocurrency.
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