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 crypto traders off trading in the market.
A stable coin is an alternative for that risk-averse crypto user. 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, why they exist and what makes stable coins unique.
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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. So, for every Tether(USDT) you see, there is a real dollar being locked up in a safe, bank, etc., to help maintain the value of the coin.
Users can easily convert their USDT to dollars and vice versa.
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 decentralized autonomous organizations 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 incentivized 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. Valorexchange is a p2p crypto exchange that allows you to exchange stable coins like Tether (USDT) securely on our platform. You could also buy cryptocurrencies like Bitcoin or Ether.
Make everyday payments: You can use stable coins to make your daily payments. There are so many international companies that accept cryptocurrencies i.e Aliexpress as payment.
They are stable: The market is highly volatile, but you can buy stable coins like Tether(USDT) that offer less volatility. Many crypto exchanges accept stable coins, so liquidity is hardly an issue.
There are different types of stable coins, and they all exist to bring stability to the crypto industry. Tether(USDT) is one of the industry’s most significant stable coins. You can get it on ValorExchange.