What are stablecoins?
Stablecoins refer to cryptocurrencies that are linked or anchored to the value of another currency, commodity, or financial instrument. The primary objective of stablecoins is to offer a viable option to counter the high volatility commonly associated with popular cryptocurrencies like Bitcoin (BTC). This volatility has made crypto investments unsuitable for everyday transactions.
How Does Stablecoin Work?
They aim to anchor their market value to an external reference, typically a fiat currency, which makes them a more practical medium of exchange than highly-volatile cryptocurrencies. They can be pegged to the value of a currency, such as the U.S. dollar, or to a commodity like gold, or they may use an algorithm to manage supply. In order to maintain price stability, stablecoins may hold reserve assets as collateral or use algorithmic formulas to manage their supply.
Why Are Stablecoins So Important?
Stablecoins have become increasingly important due to the high volatility of Bitcoin, which can make routine transactions risky for both buyers and sellers. While Bitcoin’s value can fluctuate by large amounts over short periods, they are designed to maintain a relatively stable value, providing assurance to those who accept them that their purchasing power will not be lost in the short term. By holding their value steady in a variety of ways, they aim to serve as a reliable medium of exchange for transactions.
What Kinds of Stablecoins Are There?
- Fiat-collateralized
Tether (USDT)
USD Coin (USDC)
TrueUSD (TUSD)
- Crypto-collateralized
Dai (DAI)
BitUSD (BITUSD)
sUSD (SUSD)
- Algorithmic
Ampleforth (AMPL)
Basis Cash (BAC)
Empty Set Dollar (ESD)
- Commodity-backed
Digix Gold Token (DGX)
Paxos Gold (PAXG)
Tether Gold (XAUT)
What Is the Purpose of Stablecoin?
Stablecoins serve the purpose of offering an alternative to the high volatility of popular cryptocurrencies like Bitcoin (BTC), making them more suitable for everyday transactions.
