A Complete Guide to Understand What Stablecoin Is

The high volatility of cryptocurrency trading has spurred skepticism of cryptos and blockchain technology in general. Investing in crypto assets indeed carries a high level of risk and a high level of return. However, in this world of instability, there is one safe option: Stablecoins. 

You're likely to come across Stablecoins if you want to use cryptocurrencies for something other than trading or investing. For conservative investors who fear the cryptocurrency market's volatility, Stablecoins are a far more enticing alternative.

But this brings you to the question - what is Stablecoin? Do not worry; you have come to the right place. In this tutorial, you will come across all the essential questions related to Stablecoins.

So, start this journey to know more!

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What Is Stablecoin?

  • A Stablecoin is a type of cryptocurrency backed by a reserve asset like the US dollar or gold and aims to provide price stability. 
  • It's a tokenized version of the asset that can be introduced into a blockchain ecosystem to help with seamless pass transactions, enhanced arbitrage, and value exchange.
  • It's also known as a utility token because it lets you buy and sell swiftly on decentralized exchanges that don't accept fiat currency.
  • It gained popularity because it combines the best of both worlds: the rapid processing and security of cryptocurrency payments and the volatility-free and stable prices of fiat currencies.

 Types of Stablecoins

Stablecoins are of three types based on their operating mechanics, they are:

  • Fiat-Collateralized Stablecoins
  • Fiat-collateralized Stablecoins use a fiat currency reserve, such as the US dollar to issue a sufficient amount of crypto coins.
  • Other types of collateral include precious metals like gold and silver and commodities like oil. However, the majority of today's fiat-collateralized Stablecoins rely on dollar reserves.
  • Independent custodians manage such reserves, which are audited regularly to meet the essential compliance.
  • TrueUSD (TUSDUSD) are popular cryptocurrencies backed by dollar deposits and have the same value as a single US dollar.
  • Crypto-Collateralized Stablecoins
  • Other cryptocurrencies back Stablecoins that are crypto-collateralized.
  • Because the reserve cryptocurrency may be volatile, such Stablecoins are over-collateralized. Many cryptocurrency tokens are kept as a reserve for releasing a smaller number of Stablecoins.
  • For example, $1,000 of ether might be maintained as reserves for issuing $500 in crypto-backed Stablecoins, allowing for up to 50% of reserve currency swings (ether).
  • MakerDAO's DAI (DAIUSD) is backed by Ethereum (ETHUSD) and is tied to the US dollar, allowing for using a range of crypto assets as a reserve.
  • Non-Collateralized or Algorithmic Stablecoins
  • Non-collateralized Stablecoins don't have any reserves, but they have a working mechanism to keep the price stable, similar to a central bank.
  • The dollar-pegged base coin, for example, employs a consensus method to increase or reduce token production based on demand.
  • Such practices are comparable to a central bank producing banknotes to sustain fiat currency valuations.
  • It is possible to achieve this by developing a smart contract on a decentralized platform that can execute independently.

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Difference Between Stablecoin and Cryptocurrency

Stablecoin

Cryptocurrency

It is possible to predict fluctuations in the value of Stablecoin accurately.

It isn't easy to anticipate the trends in the value of other cryptocurrencies.

Stablecoins are centralized as independent custodians maintain them.

Cryptocurrencies are decentralized.

Stablecoin's value remains constant at $1.00.

Cryptocurrency has a price range depending on its Market Capitalization.

Stablecoins' price remains constant, making them non-volatile.

Cryptocurrencies have a lot of insecurity, making them extremely unpredictable.

Is Stablecoin So Important?

Stablecoins are devoid of the volatile nature of non-pegged cryptocurrencies while retaining some of their most valuable properties:

  • Stablecoins are global, open, and available to everyone on the Internet, 24/7.
  • They transport data quickly, cheaply, and securely.
  • They can be programmed and are internet-native.

What Can You Do With Stablecoins?

Minimize Volatility:

  • Bitcoin and Ether, for example, are extremely volatile, fluctuating by every minute. 
  • If the asset is connected to a more stable currency, buyers and sellers can rest assured that the tokens' value will not fluctuate significantly in the near future.

Trade or Save Asset:

  • Stablecoins can be held without a bank account and are simple to transfer. 
  • Stablecoins' value can be easily transferred around the world, even to areas where the US dollar is scarce, or the local currency is volatile.

Earn Interest:

  • There are several simple ways to earn income on a Stablecoin investment (often higher than what a bank would offer).

Transfer Money Cheaply: 

  • With transfer fees of less than $1, people have sent as much as a million dollars worth of USDC.

Send Internationally:

  • Because of their speedy processing and low transaction fees, Stablecoins like USDC are a great way to send money over the world.

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Where to Buy Stablecoins?

  • To buy Stablecoins, you'll need a crypto exchange account or a digital wallet to buy crypto directly.
  • Some Stablecoins may be available on centralized exchanges like Coinbase; however, such exchanges may only display fiat-backed versions.
  • You may utilize a decentralized exchange to trade any existing tokens for most Stablecoins for more alternatives.

Can You Invest in Stablecoins?

Stablecoins are a sort of cryptocurrency used as a specific currency. They are not good investments. They're better adapted to digital transactions and the conversion of digital assets into and out of "real" money.

Because cryptocurrency trading and prices fluctuate so rapidly, exchanging coins for Stablecoins may be easier, faster, and less expensive than exchanging coins for actual dollars in and out of your bank account.

For example, you could convert your Bitcoin to USDT, a Stablecoin pegged to the US dollar, and it would remain on the exchange you're using and maintain its value. The Stablecoins could then be exchanged for other coins. If you transfer your Bitcoin to US dollars directly, it may take longer to reach your bank account, thus removing it from the crypto market.

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Conclusion

In this tutorial, you explored the topic of what is Stablecoin, what are its types, how Stablecoin is different from other cryptocurrencies, and what importance it holds for itself in the crypto-market.

So, whether you are new to the crypto world and its underlying technology, Blockchain or you are an investor exploring the Stablecoins, or you are an existing enthusiast in this Blockchain industry, enrolling in Simplilearn's Blockchain Certification Training program will help you with all levels of experience to explore, understand and learn more about, Stablecoins, Altcoins, Blockchain, and various other cryptocurrencies along with its related technologies and concepts.

Do you have any questions for us? Please feel free to drop them in the comments section of this tutorial; our experts will get back to you as soon as possible.

About the Author

SimplilearnSimplilearn

Simplilearn is one of the world’s leading providers of online training for Digital Marketing, Cloud Computing, Project Management, Data Science, IT, Software Development, and many other emerging technologies.

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