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Stablecoins: A Bridge Between Traditional Fiat and Digital Assets

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By , Updated On September 14, 2023

When it comes to cryptocurrency, the digital currency is known for its volatility. This means it has the potential to witness both upward and downward movements within a short period of time. The volatility of the trending cryptocurrencies can be due to multiple reasons starting from the limited market size to technical problems. 

To diminish the volatility of the cryptocurrency, stablecoins come into play. As you may sense from the word “stable” in the term, it’s an effective way to escape the fluctuations in the market. So, what are stablecoins, after all? Why should you use it? Also, is it worth it? Let’s find out:

What are Stablecoins?

Stablecoins are a fixed-price cryptocurrency that pegs their market value to some other reference. Put simply, you can call it an asset that is said to be backed up by fiat currencies like dollars or other commodities that can be traded on an exchange

The main benefit of stablecoins is that their price remains steady as per the pegged asset. Stablecoins can be both centralized and decentralized. Thus, the tactics to achieve stability may differ. However, stablecoins are ideal for facilitating transactions within the economy.

Types of Stablecoins 

Stablecoins are further classified into the below four types:

Fiat-backed Stablecoins

When a stablecoin is backed up by fiat currencies like the USD, Euro, or GBP, it is called fiat-backed stablecoin. These assets are backed by a 1:1 ratio meaning one stablecoin is worth 1 USD if it’s pegged by the same.

Crypto-backed Stablecoins

Crypto-backed stablecoins, as the name implies, are types of stablecoins that have cryptocurrencies as collateral. Due to the volatility of the cryptocurrencies, these stablecoins are generally overcollateralized, which means the value of the asset in the reserves is more than that of the worth of stablecoins issued. Say, if you have a crypto worth $4 million, it will make up $2 million in the crypto-backed stablecoin. 

Stablecoins can also be of Ethereum as tokens to ensure its fixed value despite the price fluctuations. If you want to conquer the world of Ethereum, learn about the steps to maximize liquid ETH staking gains and benefit from its stablecoins. 

Commodity-backed Stablecoins

Commodity-backed stablecoins are the ones that are pegged by the commodities like gold. It can also be backed by other assets as collateral, like oil and real estate. An example of a commodity-backed stablecoin is Digix Gold or DGX. 

Algorithmic Stablecoins 

As it’s clear from the name itself, algorithmic stablecoins work by following algorithms to control the stablecoin supply. It’s a non-collateralized stablecoin, which means, it’s not associated with any collateral. These stablecoins work on the principles of market demand/supply. 

What are the Benefits of Using Stablecoins? 

Stablecoins offers multiple benefits like the ones mentioned below:

Fast Speed: Stablecoins can ensure faster and smoother transactions for people’s convenience. Banking with stablecoins ensures that the transactions can be done round the clock, thanks to the blockchain that works Independently without the need for any third-party source. 

Stability: One of the most obvious reasons for stablecoins is their value stability. Investors who are skeptical due to the market volatility of crypto can certainly savor its benefit to hedge against the fluctuations.

Easy for exchange: Stablecoins ensure seamless money transfer than other modes like wire and checks. It allows people to send money without spending a fortune, making it the perfect method for sending money abroad.

Saves Money During Uncertainties: Stablecoins work wonders at the time when the economy is facing inflation or common uncertainties. Users can use it as a stable alternative to save money during such times

Security: Stablecoins ensure good security, thanks to the immutable and transparent records present in the blockchain. Its decentralization prevents cyberattacks, while the cryptographic tactics keep the transactions protected

Accessibility and Ease: With the seamless accessibility of sending and receiving stablecoins anywhere worldwide, stablecoins warrant both accessibility and ease for the people. For the entire process, you just need a stable internet connection, and that’s about it. 

All in all, we can say that stablecoins are definitely a bridge between traditional fiat and digital assets. Hopefully, from the above guide, you have grasped stablecoins in detail.