Get into the world of stablecoins: from definition to types, discover how these coins maintain stability in the world of Bitcoin and other digital currencies.
At the time bitcoin was first introduced, its value could change dramatically over short periods. This made it less suitable for certain types of transactions and payments because the value of the digital currency you held could significantly change by the time you wanted to use it.
However, in 2014, the first stablecoins–BitUSD and NuBits, were populated to address the issue of volatility in bitcoin and other digital currencies generally. While these stablecoins are still in existence, others were eventually created to serve the same purpose.
The idea behind stablecoins was to combine the benefits of digital currencies like bitcoin with the stability of traditional fiat currencies like the US Dollar or Euro. This way, people can enjoy the advantages of digital currencies without worrying about their value swinging wildly. So, In this article, we will explore what stablecoins are in detail, their types, and how they work. Let’s roll!
What are Stablecoins?
Stablecoins are digital currencies pegged to a stable asset, such as a traditional currency, a commodity like gold, or a combination of assets. This pegging helps maintain their value at a more constant level. For example, a stablecoin pegged to the US Dollar will aim to always be worth around $1. If it starts deviating from that value, mechanisms are often in place to bring it back in line.
How Do Stablecoins Work?
Stablecoins can be really useful because they let people use digital money without worrying too much about its value suddenly going way up or down. They're often used in digital transactions, trading, and online purchases, just like regular money.
As earlier stated, some mechanisms are often put in place to aid the stability of the stablecoins. One of the mechanisms being used is to have a reserve of real dollars, just like how banks keep money in their vaults. So, for every stablecoin that's out there, there's an actual dollar safely tucked away. This helps keep the stablecoin's value in check.
Another mechanism is the use of Smart contracts, they are like super-smart computer programs. These contracts keep an eye on the stablecoin's price. If it starts drifting away from its target value, these smart contracts create more stablecoins to bring the price down or take some out of circulation to nudge the price up.
Moreover, if too many people want stablecoin, smart contracts create more. And if people aren't interested as much, they can make a few disappear. This keeps the stablecoin's value from straying too far.
In a nutshell, see stablecoins as the leveler in the world of digital currencies. They use real-world assets and smart contracts to make sure their value stays chill,
Types of Stablecoins?
There are different types of stablecoins with various methods to achieve stability, they include;
Fiat-Collateralized Stablecoins
These are backed by a reserve of real-world assets, typically traditional currencies like USD or EUR. For each stablecoin in circulation, there is an equivalent amount of the reserve currency held in a bank account.
Tether, also known as USDT, is a prime example. It's pegged to the US Dollar, and for every USDT in circulation, there's a dollar in reserve somewhere. There is also USDC, which is equally pegged to the US Dollar. On Bitnob, users can deposit and receive money with USDT and USDC.
Crypto-Collateralized Stablecoins
These are backed by other digital currencies. People put up a certain amount of digital currency–bitcoin for example, as collateral, and in return, they receive stablecoins. If the value of the collateral drops significantly, mechanisms like automatic selling of collateral are triggered to maintain the stablecoin's value.
A good example of a crypto-collateralized stablecoin is DAI, Unlike fiat-backed stablecoins, DAI uses cryptocurrency collateral to maintain its value.
Algorithmic Stablecoins
Algorithmic stablecoins are a type of digital currency designed to maintain a stable value using computer algorithms (smart programs). Unlike other stablecoins that are backed by real-world assets like fiat money or digital currencies, algorithmic stablecoins rely on smart rules written into their code to regulate their supply and demand, keeping their value close to a target price, such as $1.
This computer-controlled approach is meant to keep the stablecoin's value stable without needing to rely on actual assets or money as a backup. See it like having a virtual manager that watches over the currency and adjusts things to keep it steady. Just remember, algorithmic stablecoins are more experimental and can sometimes be a bit complex compared to other types of stablecoins.
A good example of an algorithmic stablecoin is TerraUSD (UST). UST's price stability is achieved through a combination of algorithms and smart contracts. Which in return help control the supply and demand of UST in the market to keep its value around $1.
Use Cases of Stablecoins
Stablecoins have several use cases that make them valuable in the world of finance and digital currencies. Here are some notable ones;
Reduced Volatility Risks
One of stablecoins’ standout features is their ability to smoothen out price swings. They are designed to maintain a relatively constant value. This stability makes them more suitable for everyday transactions and as a store of value.
Financial Inclusion
Stablecoins give opportunities to those who are unbanked or underbanked, especially in regions with unstable local currencies or limited access to traditional banking services.
Fast and Borderless Transactions
If you need to send money to friends miles apart, you can send them USDT or USDC using Bitnob. Stablecoins slip through international barriers, sidestepping the usual delays associated with traditional remittances.
If this is an option that you are willing to try, you can download Bitnob to get started.