Some people are pretty suspicious of digital currencies and therefore prefer to stay away from them. However, the cryptocurrency space now has a solution in the form of coins, which have a safer value and are pretty stable compared to traditional cryptocurrencies such as bitcoin: stablecoins. What are Stablecoins, and whether they are worth buying, we would like to explain to you in more detail below. We will go into more detail about the functionality, how to buy cryptocurrencies, benefits, and types of stablecoins, or you can make remittances. Why are they so popular and allow you to avoid volatility?
Features of stablecoins
A stablecoin is any blockchain-based cryptocurrency or token whose value is pegged to another source of value, usually fiat currency. Stablecoins are typically used to facilitate cryptocurrency trading and cross-border financing.
Stablecoin is an innovative cryptocurrency representing an underlying value, such as U.S. dollars or euros, in the form of a token. Therefore, unlike unstable cryptocurrencies such as Bitcoin or Ethereum, they are well suited for value-preserving investments because they are less vulnerable to price fluctuations. They can also be tied to assets such as precious metals, gold, or oil. The general idea of stablecoins is to maintain stable payments over time.
Stablecoins are supposed to offer a solution to this problem. They are cryptocurrencies that are less susceptible to price fluctuations. Stablecoins allow a quick exchange of a crypto-asset (e.g., bitcoin) for a traditional asset (e.g., U.S. dollar or gold) without having to leave the corresponding platform (crypto-exchange).
The three most important characteristics of a stablecoin:
- The unit of account.
- Medium of exchange.
- Store of value.
In cryptocurrencies, it is common to limit the number of coins. An asset has value only when a finite quantity exists. In addition, the limitation protects against inflation. Such a scarcity is achieved, for example, by pegging the value to gold – as a finite, earthly good.
Types of Stablecoins
At their core, Stablecoins are cryptocurrencies just like Bitcoin and Ethereum – but with a built-in safety net. Unlike their crypto counterparts, stablecoins do not swirl alone in the ring of the blockchain infrastructure. Instead, they are closely linked to analog assets such as fiat currencies or gold and are thus protected against crashes into the unknown. There are several types of stablecoins. Let’s look at the popular types of stable cryptocurrency below.
Tether (USDT)
With a current daily trading volume of over $25 billion, Coin Tether (USDT) is the best-known stablecoin among cryptocurrencies with a stable value. USDT is not 100 percent backed by physically deposited U.S. dollars, but more or less liquid assets back it. Nonetheless, USDT trades reliably at its target level of $1.
Paxos Standard (PAX)
Since its launch in October 2018, the PAX coin has traded at a similar accuracy with a target value of one U.S. dollar. It runs on the Ethereum blockchain. With stackable coins like PAX, the company behind the protocol (Paxos Trust Company) is responsible for creating reserves that fully support each token. Paxos Trust Company claims to have resources that fully support each PAX.
Digix Gold (DGX)
As the name implies, the DGX is based on the value of gold. According to the website, one Digix Gold unit is equal to one gram of gold. Digix wants to create a global marketplace for buying digital gold, where users can buy gold quickly and efficiently. The gold values corresponding to the tokens are stored in safe houses, inspected quarterly by an independent auditor, Bureau Veritas.
Euro Stablecoins (EUR-L)
EUR-L is a digital asset pegged to the euro. The value of one EUR-L is stable and corresponds to one euro. Lugh keeps a reserve of as many euros as EUR-L is in circulation to ensure this equilibrium. This reserve is held in an account maintained by Société Générale and is reviewed each month (according to the monetary policy). Each time a customer wants to purchase a EUR-L, an identical amount in euros is deposited into the bank account, and the EUR-L is spent through the Tezos blockchain.
Advantages of Stablecoins
Stable coins have several advantages over other coins. It is worth paying attention to them if you want to invest in cryptocurrency and save your savings. In addition, this cryptocurrency:
- Gives a simple comparison of cryptocurrencies: Thanks to price stability, cryptocurrency rates can be compared much more quickly and transparently. If you take, for example, the two largest cryptocurrencies, Bitcoin and Ethereum, it becomes evident only after some calculations and rate analysis which of the two proved to be better. However, the exact value in dollars or euros is challenging to determine. A quick look at USDT and Bitcoin shows how much the exchange will cost.
- A lifeline when prices fall: One of the most significant advantages of stablecoins is that you can sell them immediately and thus protect yourself from cryptocurrency market downturns. In the case of Bitcoin, price fluctuations in the high double-digit range are not unusual. Once you increase your money, it can slip out of your hands again. This is where stablecoins help. When prices fall, you can switch to a stable token in just a few clicks. As bitcoin continues to fall, your assets stay the same.
The big advantage of the stablecoin mechanism is the regulated market environment of classical assets: the relatively low volatility of fiat currencies stabilizes their crypto-partners.
Gibt es Probleme mit Stabel Coins
The main danger for existing projects is the emergence of new blockchains or faster, more efficient, and cheaper platforms. So, it can have regulatory uncertainty. Consequently, users will prefer them and get rid of obsolete coins. That is, due to the fall in liquidity, some projects may disappear altogether.
The emergence of stabilized crypto, which is issued by banks of different countries (CBDC). That is, a state bank will secure a Stablecoin. Each government can impose legal restrictions on other projects, leading to their disappearance from the market.
Against the reduced volatility of cryptocurrencies, “stablecoins” that combine the advantages of decentralized and fiat money are gaining popularity. This trend is reflected in the policy of the world’s leading payment systems, which integrate stablecoins into their payment networks to maintain their positions in the competitive market. All this demonstrates the urgent need for innovative development of financial institutions and improving technologies and business processes.
The emergence and development of stablecoins are becoming a distinct trend in the financial sphere, which conditions both the realization of counterparty risks and potential opportunities. The issuance of stablecoins by commercial banks, the development of state digital currencies by several countries, and the creation of a global stablecoin by the international community allow us to talk about the significant potential of this innovative tool. The high interest of investors in this asset and the growth of the capitalization of stablecoins is an explicit confirmation of that.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Geek Vibes Nation. This article is for educational purposes only.
Hi! I’m Bryan, and I’m a passionate & expert writer with more than five years of experience. I have written about various topics such as product descriptions, travel, cryptocurrencies, and online gaming in my writing journey.
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