- Stablecoins can be backed by various assets, including the US dollar or precious metals such as gold and silver.
- Stablecoins are designed to maintain a stable price over time.
As the name suggests, stablecoin is a coin whose value is pegged, or tied to another currency, commodity, or financial instrument. Stablecoin tries to provide stability to currency and makes it suitable to the general public who thinks of it as a riskier investment. It aims to give investors an alternative in which they can invest in cryptocurrency but which has limited risk.
Types of Stablecoin
- Fiat collateralized stablecoin –
Fiat collateralized stablecoin keeps a reserve of fiat currency( or currencies) as collateral to keep the currency value stable. In stablecoin, as a reserve, it can be any precious metal like gold or silver or a commodity like crude oil, but most of the fiat collateralized stablecoin have US dollar as their reserve.
- Crypto-collateralized stablecoin –
This stablecoin is backed by the other cryptocurrency, sometimes it may be that the reserve cryptocurrency may be prone to high volatility and these stablecoins may be over collateralized-that is, the value of cryptocurrency held in reserve exceeds the value of the stablecoin issued.
So $2 million is held as a reserve for issuing $1 million of crypto back stablecoin, making it 50% secured against a decline in the price.
- Algorithmic stablecoin
These stablecoins may or may not be reserved against assets. The distinction point of this stablecoin is the strategy of keeping the value of this stablecoin stable by controlling its supply by an algorithm.
Purpose of Stablecoin in Ecosystem
- The purpose of stablecoin is to provide price stability in the volatile cryptocurrency market and attract investors seeking a less risky investment option.
- It is an alternative to highly volatile cryptocurrencies like Bitcoin (BTC) and ethereum (ETH).
How it works –
- Firstly we have to peg our stablecoin to some external reference at market value, it is fiat currency.
What is the use of stablecoin?
- Stablecoin is pegged to other crypto and sometimes to other precious metals, and it is assured twice to the price fall, it assures crypto holders that over time the value of their investment will increase or reduce.
- People who want stability in their cryptocurrency price, invest in these types of stablecoin and keep themselves away from the market volatility.
The best Stablecoin right now in the market:
- Tether(USDT): Tether is the most popular stablecoin in the crypto world, it is backed by gold, traditional currency, and cash equivalent and it is also the most secure cryptocurrency in the crypto market.
- USD Coin (USDC)
- Binance USD(BUSD)
- True USD(TUSD)
- Origin Dollar(OUSD)
- Binance USD(BUSD)
- The largest and most popular stablecoin in the market is Tether(USDT) by market capitalization. Tether is pegged by the US dollar at a 1:1 ratio and backed by gold reserves. Tether has been in the top five consistently by the market capitalization of the cryptocurrency.