Stablecoins: what they are and why you should consider investing in them
Stablecoins are a much more attractive alternative for conservative investors who dislike the volatility of the cryptocurrency market.
They represent the best of fiat and digital currencies and are available on all popular exchanges like
What are they?
If you’ve gotten this far in this article without knowing what stablecoins are, we suggest you pay attention now; if you already know what stablecoins are, feel free to skip this section.
is a cryptocurrency tied to a reserve asset like fiat currency, a commodity, or other cryptocurrencies. It is a tokenized version of the asset and can be subtly introduced into a blockchain ecosystem to facilitate transparent pass-through transactions, enhanced arbitrage, and exchange of value.
It is sometimes called a utility token because it allows you to quickly buy and sell on decentralized exchanges that do not accept fiat currencies.
Stablecoins are also used in centralized exchanges. What makes them useful in an exchange like this is the fact that fiat currencies take a long time to process, but their tokenized counterparts are standard blockchain entities that move quickly.
What are its uses?
- They can be used as everyday currency: unlike traditional cryptocurrencies, which are subject to price fluctuations and volatility, stablecoins do not fluctuate much because they are backed by national currencies. In addition, they have the same advantages as other cryptocurrencies: blockchain security, anonymity of transactions, fast transfers and absence of intermediaries. They can be used to pay for groceries, tariffs or electricity bills, among other things.
- Great potential for smart contracts: Smart contracts are often based on other cryptocurrencies, such as Ethereum. Frequent price changes can have an unpredictable impact on the terms of the contract. Using stablecoins like Tether can provide contract stability for both parties, reducing market volatility and ensuring more secure contracts are enforced by the blockchain.
- Stablecoins backed by Fiat
This type of stablecoin is linked to the sovereign legal currencies of the countries. Some of the more well-known fiat-backed stablecoins, for example, include Tether and TUSD (True USD).
However, these stablecoins are not created by the central authority. A company issues these tokens by depositing an equal amount of fiat in its reserves.
Simply put, the value of the stablecoin is based on the belief that the company behind it has the equivalent amount on hand.
- Commodity-backed stablecoins
These are stablecoins that are backed by reserved assets other than fiat currencies – by commodities. Real estate, gold, silver and various other precious metals are examples of commodities. Kitco Gold, for example, is backed by the company’s gold reserves, and the token itself is based on the Ethereum backed
ERC-20 blockchain ecosystem
- Crypto stablecoins
This type of stablecoins is backed by other cryptocurrencies; it is crypto guaranteed.
Due to the volatile nature of cryptocurrencies, these stablecoins must be overcompensated in order to be collateralized. Let’s take an example to clarify.
The encrypted stablecoin is Dai from MakerDAO. Although primarily pegged to the US dollar, the crypto-backed nature of the currency requires excessive collateral. This means that you will need to deposit $1,000 in ETH to buy $500 worth of DAI stablecoins.
They are mostly unbacked stablecoins in which prices, token numbers and other variables are manipulated using special algorithms, software and code to better manage supply and demand. . This strategy allows the company to maintain the peg of the reserve in the event of price fluctuations.
Stable investment options
If all of this sounds interesting and exciting, you might consider the following investment options.
Crypto lending is like keeping money in a bank’s savings account and earning interest on it. And if you’re looking to earn interest from it, stablecoins are a great option due to their relatively stable nature.
Since the principle of crypto lending is also associated with decentralized finance (DeFi), stablecoins could be considered a precursor to DeFi. They can be used to lend crypto on platforms like Aave.
Staking refers to the Proof-of-Stake consensus method in the crypto world, in which coins are locked by miners to verify specific transactions. Once the transactions are verified by running specific algorithms on the nodes, the coins pledged or staked generate rewards for them. Crypto staking is therefore a fun and profitable way to make money with stablecoins. Stablecoins can serve as stores of value for those who prefer HODLing coins due to their low volatility. You can even use the parts sparingly for yield farming after they have been stored for a long time.
Yield farming, simply put, is the process of locking assets or value into a pool of liquidity to help decentralized exchanges (DEXs) manage the movement of funds more efficiently. He is rewarded with a percentage of the exchange fee. It’s like using your coins to provide liquidity.
Limits of stablecoins
- The value of stablecoins is based on people’s trust in the company holding the guaranteed reserve asset, and that trust can sometimes waver.
- Stablecoins can lose value if the company goes bankrupt.
- It is essential that holders declare their creditworthiness to maintain confidence in the coin and its value.
- Unless there is a sense of turmoil in the fiat or commodity markets, stablecoins are not meant for trading gains.
Stablecoins are not your typical coin changers. In this they are different from Bitcoin, Ethereum and other crypto players. But they are the most reliable and least volatile assets. They are therefore a good option if you want passive income and blockchain technology to speed up peer-to-peer payments and transactions.
If this article has piqued your interest in stablecoins and you want to invest in them, consider doing so via
CoinSwitch. Popular stablecoins like Tether (USDT) are available on its platform, which is very user-friendly.
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