All That You Need To Know About Stablecoins
Most cryptocurrency investors have already heard about stablecoins — a type of digital currency that is designed to resist volatility and always has the same value. They came to be as a solution for volatility issues that cryptos like Bitcoin still struggle to this very day. This has made Bitcoin and other altcoins uncertain, since their value can drop at any time, seemingly unprovoked.
Stablecoins, on the other hand, do not have to worry about such problems due to the fact that they are backed by another form of asset. This usually involves fiat currencies such as the US dollar. Many see them as a method of bridging the world of crypto and the world of traditional finances. Because of that, it is expected that stablecoins will eventually play a large role in crypto adoption.
Coins Backed By Fiat Currencies
Cryptocurrencies have tried to invent a lot of different methods in order to reach stability. Some of them managed to become stablecoins through the use of complex algorithms, others are backed by another crypto, while most of the popular ones are backed by fiat. This is the most direct approach to reaching stability, and it is a method used by the coins such as USD Coin (USDC).
They are pretty easy to understand — each coin is backed by $1. As a result, each coin holds this exact value, and that value is usually not subjected to change.
By being backed to fiat currencies, stablecoins such as USDC rely on trust that the third party that is issuing the coin can actually back each token. When it comes to USDC, it is issued by CENTRE Consortium, which was created by companies Circle and Coinbase. However, CENTRE remains independent, and it oversees all the activity regarding issuing and redemption of USDC coins.
In addition, USDC is one of the ERC-20 tokens, which means that it was created on Ethereum's network. Combining Ethereum's reach and USD's stability has created a coin that many consider being a stablecoin that will dominate the future.
Benefits of Using Stablecoins
Apart from being a stable cryptocurrency, stablecoins have also grown to become a necessity on exchange platforms. Crypto trading has become very popular, and a lot of people often aim to purchase coins that are not supported on a lot of exchanges. As such, even those exchanges that do support them often have no trading pairs that would allow the purchase of such coins with fiat directly. Because of this, many choose to buy stablecoins and then trade them for their desired currency.
Stablecoins also grew popular when it comes to loans, as it guarantees the same value. Borrowing BTC back when its price was $100 and having to return it at a price of $20,000 per coin would be a nightmare for any borrower. With stablecoins, such risks are eliminated.
Stablecoins can also serve as a secure way of investing. Coinholders can invest with stablecoin and receive security tokens instead of shares. However, these security tokens can pay returns to token holders in stablecoins that are supported by fiat and can be exchanged at any time. In addition, this is blockchain-based money, which makes it borderless and available at any part of the world at any time.
In a way, this form of money works like an email — it arrives instantly, it can reach its holder anywhere in the world, and it knows no boundaries. It is truly borderless and universal, which is why it is becoming very popular and has an excessive amount of support from the community.