Discover how stablecoins work with our beginner's cryptocurrency guide.

I am an investor who always strives to minimize risks and maximize returns. Stablecoins have caught my attention as an interesting investment option. With the volatile market, exploring the possibility of investing in something more stable makes sense. However, I wonder about their reliability and trustworthiness. Through my research, I have learned that Stablecoins are a type of cryptocurrency whose value is tied to an underlying asset, such as the US dollar or gold. This ensures that their value remains relatively steady, even during market turbulence.

What are stablecoins?

Stablecoins are a specific digital currency that aims to maintain a constant value. This is accomplished by tethering the value of the stablecoin to a tangible asset, such as the US dollar or gold.. This ensures that the stablecoin's value is not subject to the same volatility as other cryptocurrencies, which can fluctuate wildly. When someone purchases a stablecoin, they buy a digital asset with a value tied to the underlying asset's value. For instance, if a stablecoin is linked to the value of the US dollar, then one unit of the stablecoin would always be worth one dollar. Stablecoins can be helpful for several reasons. For one, they can be used to transact on blockchain networks without risking losing value due to market volatility.

Furthermore, stablecoins can potentially serve as a reliable means of preserving value over time. Similar to traditional fiat currencies. Stablecoins are essential to the cryptocurrency ecosystem as they offer stability, providing a way to reduce risk and volatility while still harnessing the power of blockchain technology.

Type of Stablecoins

 1) Fiat-backed,

Fiat-backed stablecoins are tied to the value of A fiat currency, for example, the US dollar or Euro. These stablecoins are backed by reserves of the underlying currency, which are held in a trust account. 

2) Commodity-backed,

Commodity-backed stablecoins, on the other hand, are tied to the value of a commodity, such as gold or silver. These stablecoins are backed by reserves of the underlying commodity, which are held in a trust account.

 3) Algorithmic stablecoins.

Algorithmic stablecoins use complex algorithms to keep their value stable without needing reserves. Overall, stablecoins are a crucial part of blockchain-based ecosystems, providing a dependable and consistent form of cryptocurrency. 

 4) Crypto-backed

It's worth noting that stablecoins can be supported by various cryptocurrencies to introduce the underlying crypto asset on different blockchains. These stablecoins are usually over-collateralized, which means that the crypto reserve supporting them significantly exceeds their actual value. The reason behind this is the unpredictable nature of the cryptocurrency market, which can also impact the reserve. For instance, MakerDAO's DAI is tied to the USD but is upheld by ETH.

What are the most popular stablecoins?

Source: coinmarketcap

Tether

There is a stablecoin popularly known as USDT, which claims to have a 1:1 ratio to the U.S. dollar. According to the crypto giant behind it, for every USDT, there is one dollar in reserves. However, some people still view this entity with skepticism. The company behind USDT was fined $42.5 million by the U.S. Commodity Futures Trading Commission (CFTC) in October 2021 for lying about its reserves between 2016 and 2019. This has raised concerns about whether or not Tether, the company behind USDT, is being truthful about its reserves. Despite ongoing regulatory scrutiny, Tether denies any misconceptions about its reserves and USDT.

USD Coin

In 2018, Circle and Coinbase introduced the USD Coin, a digital currency tied to the U.S. dollar's value at 1:1. The USD Coin is an open-source protocol that allows other individuals and companies to create their products using this currency. Due to its backing by assets derived from the U.S. dollar, the USD Coin gained popularity as an alternative to USDT. This provides proof of the currency's value and ensures that it is a reliable investment option for those looking to diversify their portfolio.

DAI

It was originally created by The Maker Foundation to provide businesses with a stable lending asset, but later governance was transferred to MakerDAO. What makes DAI stand out is its over-collateralization. For every DAI in circulation, there is collateral worth more than what is locked in a Maker Vault, which helps prevent the negative effects of market volatility. Additionally, DAI is extensively used for DApp integration, supporting over 400 DApps and wallets.

Are stablecoins safe?

Stablecoins are often considered the safest option among cryptocurrencies due to their lack of volatility. However, their safety greatly depends on the issuer and how the coin is backed. Reserves backing the coin can be subject to credit, market, and liquidity risks, and shady practices can compromise their safety. The lack of regulation in this asset class has led to false claims and legal problems for some stablecoin projects. It's best to stick with stable cryptocurrencies that are well-known and have a high market cap to ensure safety.

What is stablecoin's future in crypto?

Stablecoins have a significant role to play in the future of crypto. They provide a cheaper and faster way to transact while offering greater security. Additionally, stablecoins can aid in upgrading payment systems and facilitating cross-border remittance, which is becoming increasingly important in our global economy. However, the lack of regulation in this asset class means it's essential to stick with well-known and high-market-cap stable cryptocurrencies to ensure safety.

However, it's essential to conduct thorough research when investing in stablecoins since not all stablecoins are created equally. It's recommended to research the specific stablecoin of interest.