We all have heard about different forms of cryptocurrency investment in bitphone.net and also know about their volatile nature. The volatile nature of cryptocurrencies makes financial investors unsure about investment.
What if every digital server breaks down one day, or the wallets in your crypto exchange platform get hacked? To solve this issue, stablecoins were launched.
Stablecoins are one of the forms of digital currencies that have a backing of physical assets by methods such as fiat currencies, gold to provide maximum assurance. With this rendition, these coins provide a stable value. Combinations of both worlds are fast transferrable qualities with enhanced security.
A stable coin falls under the category of cryptocurrencies that are pegged to the US dollar. This gives a clear indication that the market price ratio of Tether and USDC coin will almost remain close for an extended period. If we talk about the other forms of stable assets like essential commodities or precious metals, they can back a stable coin.
Types of Stable Coins
There are three types of stablecoins:
Fiat-backed stablecoins
A fiat backing provides the cryptocurrencies with the assurance of the traditional monetary system. It forms a bridge through which customers can possess the beautiful features of cryptocurrencies and US dollar currency assurance. The US dollar is used due to its wide application globally.
The stablecoins a fiat cash ratio in big exchanges based on a 1:1 ratio. This thus enables the customers to choose between the crypto and the currency easily. They can easily switch back and forth.
Some of the popular examples for fiat pegged stablecoins are Tether and TrueUSD.
Commodity-backed stablecoins
These particular stablecoins are more or less similar to fiat-backed stablecoins. The difference occurs that commodity-backed stablecoins are backed by physical assets such as gold reserves. At the same time, the fiat-backed is backed by currency/cash. Sometimes, silver or other physical commodities are used to back up the commodities.
The best part about this investment is that if you want to buy fractional parts of gold, you can easily do such with the help of stablecoins. If you are planning to buy gold, you should note that it is not necessarily required for you to buy a whole gold bar.
Some examples are Gold coins (1 ounce of gold = 1000 Gold coins), HelloGold.
Crypto-backed stablecoins
Another issue with such cryptos is that they can be hacked. Imagine storing the coins in your wallets, but someone got hold of your account. And at once, you lose everything. This issue is resolved by collateralization using an algorithm. The algorithm used for backing the stable coins offers a higher value than the 1:1 ratio to compensate for the volatility. Examples of such coins are DAI, AMPL.
Use of Stablecoins
For many cryptocurrency traders, these serve as a method to hedge the crypto values or the portfolio easily. One need not think about cashing it out to FIAT. After all, people prefer FIAT in our day-to-day lives, and in certain areas, only FIAT works. Moreover, there is a large portion of the market where cryptocurrency is not accepted as a payment method. So, to maintain this balance, these stablecoins can be quite handy.
In reports, it has also been shown to be a big part of the decentralization of finance. Abbreviated for Defi, it is an improved alternative to the traditional finance systems. Since it is a part of cryptocurrency, it also has the dynamics of Bitcoins.
These stablecoins bring the world together. Since stablecoins is a global currency, it initiates all borderless payments in real-time. Therefore, it can connect the world with the real money market and the real-time crypto market. The value of remittances is also quite cheap. Moreover, stablecoins are also speedier and easier to execute in terms of transactions.
At the end of the day, it can be stated that the future of these stable coins is quite promising; it will eliminate inflation and give the assurance of the resources present. The Fiat-based will also keep the two-way bridge between the real cash and the crypto to make it a learning curve till Bitcoins are the new financial asset.
