What is a stable coin? — A beginners guide.
The crypto industry has faced a lot of skepticism due to its highly volatile nature. Even with the growing number of crypto exchanges and crypto-based activities, there are many risks and rewards associated with the industry that might throw new investors off investing in the market.
A stable coin is an alternative for that risk-averse investor. Stable coins are pegged or attached to fiat currencies or real world assets. Valorexchange is a p2p crypto exchange that allows you to buy or sell stable coins like Tether (USDT) securely on the platform. You could also buy cryptocurrencies like Bitcoin or Ether.
There are four types of stable coins. We have fiat currency backed stable coins, commodity-backed stable coins, crypto-backed stable coins, and algorithm-backed stable coins. We’ll go into each of them in this article.
Types of stable coins
There are four types of stable coins, such as:
Fiat backed stable coins: These stable coins represent real-world money or fiat currencies. For example, Tether(USDT) is supported by the US dollar. Users can easily convert their USDT to dollars and vice versa. There are fiat currencies reserved as collateral for every fiat backed stable coin in existence.
Commodity backed stable coins: These coins are backed by commodities such as gold, silver, real estate, etc. They are very much like fiat-backed stable coins but represent mainly precious metals instead. An example of this is Kitco Gold.
Crypto-backed stable coins: This type of stable coin is backed by cryptocurrencies. These types use smart contracts to control the minting and burning of existing currencies. Some of these coins run on decentralised autonomous organisations or DAOs.
This works because when the stable coin drops below $1, incentives are created for holders to return their stable coins. When the coin’s price rises above $1, users would be incentivised to create the token, increasing the supply and lowering the cost. When the price decreases, the coin would return to its original price of $1. All this is done to control and stabilize the current circulation of the currency.
Algorithmic stable coins: These eliminate the need for reserves. With this system, an algorithm and smart contract manages the supply of the token issued. It’s similar to the central bank and its monetary policies. It is more challenging to run and is less common than other types of stable coins.
How this works is that the coin is designed to track the activities of a fiat currency. An algorithm is designed to reduce or increase the number of stable coins in circulation to help maintain the cash price it tracks. It could burn, stake, or buy back existing coins as far as the price is stable.
Benefits of stable coins
Here are some benefits of stable coins
They are blockchain-based: You can sell or buy cryptocurrencies, including stable coins, anywhere globally due to blockchain technology.
You can use them to make everyday payments: You can use stable coins to make your daily payments.
They are a stable crypto investment option: The market is highly volatile, but you can buy cryptocurrencies like Tether that offer less volatility. Many crypto exchanges accept stable coins, so liquidity is hardly an issue.