Table of Contents
What are Stable Coins?
Stable coins are pegged to any asset or underlying cryptocurrency. The prices are fixed against a reserve asset such as the US dollar or gold. They act as a link between cryptocurrency and traditional fiat money.
This significantly minimizes volatility in comparison to something like Bitcoin, resulting in a kind of digital money that is more suitable for everyday business as well as inter-exchange transactions.
Combining the permanence of conventional assets with the flexibility of digital assets has proven to be a phenomenally appealing concept. Billions of dollars have poured into stable coins such as USD Coin (USDC), which have grown to be among the most popular methods of storing and trading value in the crypto ecosystem.
The cryptocurrency market is a roller coaster ride of highs and lows; bitcoin may soar to new heights today but crash to the ground tomorrow. And the inherent insecurity of the bitcoin would prevent investors from placing their confidence in it.
Cryptocurrencies, like any emerging asset class, are subject to market forces. As a result, numerous crypto projects are actively pursuing strategies to mitigate risk and increase participation in the broader crypto ecosystem.
Current solutions go well beyond the standard market’s buy, sell, and stop orders. Rather than that, price stability is embedded into the assets themselves. As a result, stable coins are a whole new subgroup of the bitcoin market. These tokens are intended to perform as their name implies, with steadiness.
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How do Stable Coins work?
Stablecoins are digital currencies that are tied to a “stable” reserve asset such as gold, silver & other precious metals, the United States dollar, or even any other fiat currency like rupees. Stablecoins are intended to alleviate some of the volatility associated with unpegged cryptocurrencies such as Bitcoin.
Stablecoins are backed by a variety of assets, including fiat currency (conventional currencies such as the US dollars in your bank account), other cryptocurrencies, precious metals, and algorithms. However, the source of a cryptocurrency’s support might impact its risk level.
Additionally, a stable coin can be anchored to real estate, so that you can acquire an entire stable coin reserve by pledging your restaurant or even your apartment. Connecting a cryptocurrency to a physical asset allows for price stability during periods of high volatility. Stablecoins are long-term investments, and holders may anticipate a fixed rate of return.
For example, a fiat-backed stable coin may be more stable since it is tied to a centralized financial system with an authority figure (such as a central bank) that may intervene and stabilize prices during periods of market volatility.
Stablecoins that aren’t tied to a single financial institution, like a bitcoin-backed stable coin, may see big price changes quickly because there isn’t a single person or group that keeps an eye on the stable coins peg.
Types of Stable coins:
Stablecoins are backed by actual assets such as precious metals, oil, and real estate. The most commonly collateralized asset is gold; . However, it is essential to keep in mind that these commodities are subject to price fluctuation and hence have the potential to lose value.
Commodity-backed stable coins enable investors to access assets that are otherwise unavailable locally. For example, procuring a gold bar and securing a secure storage facility is complicated and expensive in many locations. As a result, physical commodities such as gold and silver are not always viable investments. Stablecoins, on the other hand, are useful to people who want to exchange tokens for cash or own the tokenized asset that is backed by the commodity.
In a closely connected market area, the tokenization of assets continues to gain attention. Tokenized assets, like commodity-backed stable coins, derive their value from external, transferable assets like gold.
For example, Gold-backed stable coins are Tether Gold (XAUT), Paxos Gold (PAXG), Gold Mint, Ekon Gold, etc.
Stable coins are also backed by commodities such as Silver, Oil & other commodities.
Fiat-backed Stablecoins are popular because they are backed 1:1 by fiat cash. Due to the absence of another cryptocurrency as collateral, this sort of stable coin is classified as an off-chain asset.
Fiat collateral is held in reserve by a central issuer or financial institution and must remain proportional to the total number of stable coin tokens in circulation.
For instance, if an issuer (let’s say RBI) possesses 1 lakh crore worth of fiat money, it can distribute no more than 1 lakh crore worth of stable coins, each worth 1 rupee.
Stable coins backed by any countries fiat currency are known as fiat-backed stable coins.
For example, Stablecoins like Paxos Standard, Tether, the Gemini Dollar, True USD, and the Paxos Standard Tether, USDP, etc.
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Stablecoins that are crypto-collateralized are backed by another cryptocurrency. This procedure takes place on-chain and relies on smart contracts rather than a central issuer.
When you purchase a stable coin of this type, you entrust your cryptocurrency to a smart contract in exchange for tokens of equal representational value. You may then reinvest your stable coin in the same smart contract in order to withdraw your initial collateral.
DAI is the most well-known stable coin that utilizes this approach. This is done by using a collateralized debt position (CDP) on the MakerDAO blockchain to make sure that assets are safe as collateral.
Stablecoins that are crypto-collateralized are also over-collateralized to protect against volatility in the requisite cryptocurrency collateral asset.
Let’s say you need to purchase Rs. 10,000 worth of DAI stable coins. Here, you would need to deposit Rs. 20,000 worth of Bitcoin at a 200% collateralized ratio. If the market price of Bitcoin falls but remains above a certain level, the excess collateral stabilizes the price of DAI.
People who have CDPs can get their money back from the smart contract when the price of Bitcoin falls below a certain level, so the CDP can be liquidated.
Here, the stable coins will be backed by any other well-known cryptocurrency. It means, to mint a stable coin, a certain amount of relative cryptocurrency needs to be kept as reserve.
For example, Wrapped Bitcoin (WBTC).
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Stablecoins based on algorithms does not require money or cryptocurrency as collateral. Rather than that, their price stability is achieved by the use of specialized algorithms and smart contracts to control the number of tokens in circulation.
When the market price of the stable coin falls below the price of the fiat currency it monitors, an algorithmic stable coin system will then lower the number of tokens in circulation. If the value of the stable coin is higher than the value of the fiat currency, then new stable coins are made to lower the value of the stable coin.
A coded stable coin based on algorithms. A pure demand and supply system wherein, if the price of stable coin increase, more of such coins are issued and vice versa.
For example, Defi Dollar (USDC)
Top 10 Best Stable Coin (USTokens in the Market:
- Tether (USDT)
- Binance (BUSD)
- USD Coin (USDC)
- True USD (TUSD)
- Dai (DAI)
- Pax Dollar (USDP)
- USDD (USDD)
- Gemini Dollar (GUSD)
- Fei USD (FEI)
- Terra Classic USD (USTC)
Advantages of Stable coin:
- Safe investment due to asset backing.
- Easy Mobility.
- Accessible without a fuss.
- Low Volatility compared to regular cryptocurrencies.
- They assist in foreign payments much more feasibly.
- Regulated & Organized market.
- Data Privacy is upheld.
- Low fee Financial services.
- Digital option backing Traditional currency.
- Earn rewards or interest by owing Stable coins.
Disadvantages of Stable coin:
- New technology with Bugs & Vulnerabilities.
- Investors many become victims of Fraud.
- Regulatory Uncertainty.
- Stable coins are lost if the Private key guarding the said asset is forgotten.
- Risky asset.
How to Invest in a Stable coin?
Stable coins are offered in all your cryptocurrency exchange account. They are readily available and easily traded all around the system.
Stablecoin investment has gained popularity recently as a secure method of investing in cryptocurrencies. Through loans and staking, an investor may earn interest on stable coins.
Stablecoin lending refers to the act of lending stable coins to other investors, whereas stable coin staking refers to the act of staking stable coins in the proof of stake mechanism in order to earn rewards.
Tether is a cryptocurrency issued by Bitfinex. Tether is a cryptocurrency backed by US dollars and is the 5th largest cryptocurrency in the world.
This indicates that a certain quantity of cash, assets, or treasury bills will be put aside as collateral for minting a stable coin. The basic tether ratio is 1 tether coin for every 1 US dollar.
Where To Buy Stable coin?
To purchase stable coins, you’ll need an account with a cryptocurrency exchange or a digital wallet that supports direct crypto purchases. Certain services may not be accessible in all areas, so check to ensure that the services you desire are available where you reside.
While centralized exchanges like WazirX may list some stable coins, they may only list fiat-backed versions. If you want to trade any existing token for the most stable coins, you can use a decentralized exchange.
If you wish to buy the world’s largest ‘Stable-coin’. You can do so via India’s largest Cryptocurrency exchange. CLICK HERE! To open your first WazirX Crypto exchange account.
Stablecoins provide a means of bridging the divide between fiat currencies such as the US dollar and cryptocurrencies. Stablecoins are a unique solution to bitcoin volatility since they are price-stable digital assets that behave similarly to cash yet retain the mobility and usefulness of cryptocurrency.
Stablecoins are attractive because they are designed to survive volatility in a manner that other cryptocurrencies cannot, while still providing mobility and accessibility. A more stable cryptocurrency is still decentralized, which means it is not subject to a centralized system’s laws and regulations.
This serves as an entry point into the world of Defi, with benefits such as speedier money transfers, direct access to financial services without the need for applications, the protection of financial data, and the avoidance of financial service costs. Stablecoins backed by a central bank offers a digital alternative to traditional currencies.
While stable coins are less volatile than other types of cryptocurrency, they still rely on emerging technology that may have undisclosed problems or weaknesses. Additionally, there is always a risk of losing the private keys that let you access your bitcoin, whether as a result of a hack or user error.
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