Stablecoins are a new class of cryptocurrency backed by reserve assets such as the dollar, which are trying to provide price stability on an ongoing basis.
Stablecoins have gained significant traction; Because it tries to offer the best in the market in terms of instantaneous processing, security, or privacy of cryptocurrency payments, and stable, volatile valuations of fiat currencies.
A stablecoin is a currency that is not exposed to sudden fluctuations like other cryptocurrencies are exposed to.
The reason for this is that stable coins attempt to link their market value to some external references, such as their correlation with a currency such as the US dollar, or the price of a commodity such as gold. its derivatives.
It is worth noting here that stable cryptocurrencies operate in the same system as other cryptocurrencies, and are entirely based on blockchain technology.
Why is Stablecoins important?
There are many advantages of stable currencies, we will explain these features to you in detail, namely:
- The stablecoin is fully cryptocurrency.
- The stablecoin is used to buy other digital currencies, such as Bitcoin.
- Stable currency protects the investor from the volatility of the cryptocurrency markets.
- The stablecoin can be traded throughout the day and the week.
- The process of sending and receiving the stablecoin takes a few seconds.
- There is no central bank that controls stablecoins.
Stable cryptocurrencies bridge the gap between fiat currencies like the US dollar and cryptocurrencies. Since they are price-stable digital assets, they behave somewhat like fiat currencies, but at the same time, they maintain the portability and usefulness of the cryptocurrency.
The stablecoins are primarily designed to buy other digital currencies, such as Bitcoin. This is because many cryptocurrency exchanges did not have access to traditional banking services.
Stablecoins are a new solution to crypto volatility, as price stability is built directly into the assets themselves.
A stablecoin is more useful than a country-issued currency; Because you can use it anywhere in the world 24 hours a day – seven days a week – and without the need to rely on banks.
Funds transfers, when using stablecoins, take a few seconds to complete.
Another useful feature of stablecoins is that they have cryptocurrency backed by other cryptocurrencies. Given that cryptocurrency reserves may also be subject to high volatility, these stablecoins are highly collateral, i.e. more cryptocurrencies are held as reserves versus fewer stablecoins.
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And stablecoins work with so-called smart contracts on the Blockchain. Unlike traditional contracts, stablecoins do not require any legal authority to enforce them.
The code automatically determines the terms of the agreement and how and when the funds will be transferred. Which makes stablecoins programmable compared to dollars that can’t be programmed.
Smart contracts use stablecoins for smooth trading, as well as in lending and insurance, payments, decentralized autonomous organizations, and prediction markets.
Thus, smart contracts lead to the use of stablecoins not only for smooth trading but also for lending, payments, insurance, prediction markets and decentralized autonomous organizations.
What are the types of stablecoins?
There are four basic types of stablecoins, identifiable by their underlying collateral structure: fiat-backed, crypto-backed, commodity-backed, and algorithm-backed.
Currencies backed by fiat currency or Fiat
This is the most common type of stable coin. Fiat-backed stable coins maintain a reserve of fiat currencies such as the US dollar – as a guarantee of issuing an appropriate number of cryptocurrencies.
It may include other guarantees such as guarantees of precious metals such as gold and silver, or guarantees of commodities such as oil. However, most stablecoins currently use dollar reserves.
These reserves are maintained by independent custodians and are regularly audited for compliance. Tether (USDT) and TrueUSD are popular cryptocurrencies that have a value equivalent to one US dollar and are backed by dollar deposits.
This type of stable coin is also called traditional (off-chain) collateral since the underlying collateral here is not another cryptocurrency.
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Secured Crypto Stable Coins
This type of crypto stablecoin is backed by other cryptocurrencies due to the sudden fluctuations that the cryptocurrency reserve may experience.
While this type works in theory similar to fiat-backed stable coins, there are key differences between the two, as fiat-backed stable coins are operated using a centralized payment system, while crypto-backed stable coins are operated in a decentralized manner. using smart contracts.
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