One of the main disadvantages of cryptocurrencies is their extreme volatility that prevents us from using them as an effective method of exchange. In other words, the price of users’ assets is constantly going up and down. This has led to the increased need the development of new technologies – ones that help users store their funds and maintain their consistent value and, at the same time, allow them to transfer them according to their liking.
This is where stablecoins shine, as they combine the stable nature of fiat currencies and some central features of cryptocurrencies.
What are stablecoins? How do they work? What types of stable coins are there?
Let’s find out.
What are Stablecoins and why do They Matter?
Simply put, stablecoins are cryptocurrencies that are pegged to a stable asset (e.g. fiat currencies or precious metals) at the 1:1 ratio.
There are many benefits of stablecoins and the most prominent one is achieving stability both for short-term transactions and long-term investments.
Namely, the high volatility of cryptocurrencies may be lucrative to those investors wanting to gain profits faster. Still, we should not forget the problems the crypto market faced in 2018. Namely, the industry fell from $870 billion to only $100 billion.
Given these worrying figures, it’s not surprising that more and more investors are now looking for trusted stores of value that will help them maintain the value of their funds during price changes and prevent major financial losses.
Alternatively, many users focus on short-term trading. Their goal is to complete the trade efficiently, ensuring that the value of their funds won’t be affected by crypto fluctuations. What does this mean? Well, if a cryptocurrency is pegged to Bitcoin and its value drops fast, this means that the value of your assets will trend downwards.
Different Types of Stablecoins
There are three key types of stable coins you should know of:
- Fiat-backed stablecoins. They are pegged to real-world, national currencies. For example, Tether is pegged 1:1 to the U.S. Dollar. Apart from providing greater stability, one of their major benefits is that they are built on a quite simple concept that is easy-to-understand. To remain the 1:1 peg, they are highly regulated and require consistent auditing.
- Crypto-collateralized stablecoins are pegged to other cryptocurrencies. They keep the 1:1 ratio through the process of over-collateralization (posting more collateral than is really needed in order to secure funds).
- Non-collateralized stablecoins are those that, unlike the above mentioned forms of coins, require no backing. They can be, for example, pegged to precious metals or oil.
The Best Stablecoins to Invest In
In the growing industry, where are many stablecoins to choose from, it’s important to make the right choices. Here are a few reliable options to consider.
Tether is probably the most popular cryptocurrency that is used as a trading pair across numerous exchanges. It is a fiat-backed currency, with the 1:1 ratio to the U.S. Dollar. One of its main pros is that it keeps the $1 value, meaning that users can avoid paying exchange fees and transaction costs. Even though this is a pretty big thing Tether has recently gained lots of negative press. Namely, some claim that Bitfinex is behind it, attempting to manipulate crypto markets.
Anchor is a stable cryptocurrency, created as a two-token system. Namely, it contains the Anchor coin (its currency and payment token) and the Dock Token (its utility token that provides the stability of the system). To stabilize the value of any currency and reduce price volatility, they also introduced their own monetary measurement standard – the Monetary Measurement Unit that is based on the GDP of almost 200 world’s countries.
MakerDAO operates as a Decentralized Autonomous Organization. What does this mean? Well, even though DAI (its stablecoin) is pegged to the USD, it is fully supported by Ether. It also uses the two-token system, where DAI is pegged at the ratio 1:1 with the U.S. Dollar.
TrueUSD is another fiat-collateralized coin. This cryptocurrency has gained ground as one of the most trustworthy options in the crypto market and, as such, it holds partnerships with numerous financial organizations and trusts. It has multiple advantages that set it apart, including the fulfillment of legal regulations for the USD-peg, real-time monitoring of their coin, as well as high levels of transparency achieved through continuous audits.
Gemini is a US-based cryptocurrency that is, similarly to the above mentioned ones, pegged to the USD at the one-to-one ration. One of the main benefits of Gemini is that meets strict standards of compliance within the regulatory framework and high transparency.
Over to you
The opinions of stablecoins are polarized. While some critics believe that they cannot work without partnerships with the third-party, others perceive them as a solution to the issue of market instabilities.
We should remember that many users are still ignoring cryptocurrencies simply because they still don’t understand how they work or they’re afraid of high price volatility. Stablecoins finally give us the opportunity to bridge gaps between the security of traditional currencies and the new opportunities provided by cryptocurrencies. As such, they definitely deserve their place in the crypto universe.
Any thoughts on stablecoins? We’re listening!