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How stablecoins work

Cryptocurrency has become a tool for trading and savings instead of entertainment for geeks. It is not without flaws, the main of which is volatility. Cryptocurrency is not secured by anything, its value depends only on the belief of users in the appreciation. Volatility and instability do not allow digital assets to take the place of fiat. Proponents of traditional approaches to investment and trading use familiar tools. To reduce volatility, coins backed by material values ​​have been created.

What are stablecoins? Stablecoins take their place in the list of cryptocurrencies. They are not like virtual money in the usual sense. Coins are used for different purposes. They attract users who avoid the volatility of cryptocurrencies.

Stablecoins allow all standard operations similar to fiat money. Main functions:

  • Payment instrument.
  • Investment tool.
  • A store of value or asset.

A stablecoin is backed by fiat currency or another crypto asset in a 1:1 ratio. Deviations are allowed, but the rate is maintained as long as the coin exists. Market fluctuations, other factors do not affect the price of the token.

Categories of secured cryptocurrencies:

  • Tied to fiat money or material values ​​(oil, gold, silver).
  • Backed by other coins.
  • Not tied to any asset, the rate is supported by the issuance of coins. Also called algorithmic.

The value of a coin depends on the collateral currency. If the dollar falls, then the cryptocurrency pegged to it will also become less attractive to investors.

Usage

Stablecoins serve as a store of value. That being said, there are many popular secured coins that help bring the digital world closer to the real one. These assets serve as a universally understood means of measuring price.

Large investors can transfer their savings into virtual money and trade on TabTrader.

Stablecoin works in the opposite direction. If a trader has a lot of coins but does not want to withdraw to fiat yet, then he uses secured assets. They save money during times of increased market volatility.

Varieties

Stablecoins are assets backed by material assets, fiat, or other coins. Such cryptocurrencies are classified depending on the source of exchange rate support. The most numerous coins backed by fiat currency are the US dollar, euro, yen, and other money. However, other types of stable crypto coins are also developing.

Fiat backed

The simplest and most common type of stablecoin. The issuer issues coins usually at a ratio of 1:1 to fiat currency. For example, a company has assets in the amount of $5 million. For this amount, it issues 5 million coins that can be exchanged for other currencies, sold, and stored.

In simple terms, stablecoins backed by fiat money are IOUs. The owner of the token can at any time present it to the issuer and receive currency in return.

Backed by cryptocurrency

Reinforcements are other coins. This solves the main problem of fiat-backed tokens, the loss of decentralization. The money is kept in banks, which are regulated by the financial institutions of the country of registration.

Cryptocurrency does not have a single governing body. The main advantage is decentralization. Therefore, stablecoins are issued with the provision of coins for popular projects (Bitcoin, Ethereum, and others).

The problem of high volatility is solved by creating a reserve capital with a multiplicity of at least 2. This will allow you to maintain the course when the price falls.

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He is currently Editor at Inferse.com. He is a political columnist for the Finger Lakes Times, Eiram.org, and is the co-founder of InFocus.co. His passions include politics, golf, the media, and gadgets.