Stablecoins are digital currencies whose value are pegged to stable external assets like the U.S. dollar or gold to stabilize the price. Stablecoins are primarily designed to reduce the volatility associated with other cryptocurrencies. Stablecoins have become more popular as they offer both the instant processing and anonymity of transactions associated with cryptocurrencies and the stability associated with fiat.
Many traders, investors and institutions make use of stablecoins as a store of value for digital assets due to it’s volatility-free characteristic. They are also more suited for day to day transactions between individuals or commercial activities between institutions due to their stability.
Some importance of stable coins are that they are easily available to anyone on the internet just like any other cryptocurrency and they are also very fast and cheap to transact with. They have also proven to be a good choice for cross border payments.
TYPES OF STABLECOIN COLLATERALS
Stability is mainly achieved for cryptocurrencies when they are collateralized using another asset as backing. Some stablecoins are achieved by using fiat or even precious metals such as gold or silver as collateral. Some assets used as collaterals include:
- FIAT: Fiat is the most common collateral for stablecoins and this is done by maintaining a fiat currency reserve as collateral to issue a suitable number of stable coins. The U.S. dollar is the most popular collateral among fiat currencies as it is used as collateral for most stable coins such as USDT, USDC, BUSD and many others.
- PRECIOUS METALS: Some stable coins are pegged to the value of precious metals such as gold and silver. Some examples are Tether gold, DigixGlobal and Paxos Gold(PAXG).
- CRYPTOCURRENCIES: Some stablecoins are backed by other cryptocurrencies. This is usually issued to launch an already existing asset on another blockchain. Examples of this are; wBTC, wBNB, wETH and so many others.
EXAMPLES OF POPULAR STABLECOINS
Some examples of very popular stablecoins include;
- TETHER (USDT): Tether was initially launched in 2014 as realcoin with one tether said to always be worth 1 U.S. dollar. It is one of the most valuable cryptocurrencies by market capitalization.
- USD COIN (USDC): Launched in 2018 with the coinbase crypto exchange being it’s founding member. USDC has gained wide adoption and is used in areas of decentralized finance (DEFI) and gaming.
- BINANCE USD (BUSD): Launched in 2019 with Binance being it’s founding member, users converting digital assets to BUSD get to use the exchange services at zero fees.
WHY YOU SHOULD USE STABLECOINS
Many traders, investors and even big institutions make use of stablecoins for various reasons. Some of the reasons why you should make use of stablecoins include:
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- REDUCE VOLATILITY: Unlike other cryptocurrencies which fluctuates over time due to their volatility, stablecoins are pegged to the value of different external assets such as the U.S. dollar. This gives users the certainty that the value of their digital assets will neither rise nor crash over time.
- EARN INTEREST: Instead of holding stable coins in wallets without making profits from them, they can be employed in areas of crypto lending or staking to yield interest.
- EASY AND CHEAP MONEY TRANSFER: With stable coins, transfer of money between individuals or institutions is easier and cheaper. Millions of dollars can be sent in a matter of seconds with transaction fees as low as 1 dollar.
- INTERNATIONAL MONEY TRANSFER: Transferring money across borders has always been a big challenge but with stablecoins, it has been made easier and can be completed in few seconds with very low transaction charges.
Due to the stability and flexibility associated with stablecoins, they have gained wide adoption and are becoming popular by the day. They have proven to be a good choice for day to day transactions and a very reliable store of value without risk of losing assets as a result of volatility. Stablecoins can also be employed to yield passive income in the areas of crypto lending and staking.