Stablecoins form a bridge between cryptocurrency and everyday fiat money because their value is pegged to a reserve real life asset like the USD or gold.

What are Stable Coins?

What are stablecoins?

Stablecoins are digital currencies that are pegged to a “stable” reserve asset like the gold or the USD. The Stablecoins are mainly used to lessen volatility relative to cryptocurrencies like Bitcoin.

Stablecoins form a bridge between cryptocurrency and everyday fiat money because their value is pegged to a reserve real life asset like the USD or gold. This process removes volatility compared to something like the Ethereum and results in a form of digital currency that is better used to everything from commerce, shopping to making transfers between various exchanges.

The coalescence of traditionally stable assets with digital asset flexibility has proven to be a very popular concept. The value of the stablecoins market is increasing at a fast rate with billions of dollars in value flowing into those like the USD Coin (USDC) as they have become one of the most popular ways to store and trade value in the crypto world.

Why are stablecoins important?

As an example, the USDC, is backed by dollar-denominated assets of at least equal value to the USDC in circulation in multiple accounts within US regulated financial institutions. Such accounts are verified publicly by an independent accounting firm.

Like many stablecoins, the USDC currently operates on the Ethereum network. Stablecoins are relatively free from the volatility of their non-pegged cryptocurrencies counterparts, while inheriting some of their most sought-after properties:

  • Stablecoins are global, accessible and open to everyone on the internet, all the time.
  • They’re digitally native to the Internet infrastructure and widely programmable
  • They’re fast, cheap and secure to transmit and exchange

Algorithmic Stablecoins

Algorithm based stablecoins do not have any attached collateral. Therefore, they are also called non-collateralized stablecoins. Algorithm-based stablecoins are completely new variants of cryptocurrency created to offer improved price stability. In addition, it can also help in balancing the supply and demand of the asset in circulation. Oftenly, algorithm-based stablecoins offer considerably improved capital efficiency in comparison to collateralized stablecoins.

What is the use of stablecoins?

  • Minimize and remove volatility. The value of cryptocurrencies like Ethereum, Bitcoin or Matic fluctuates quite often — sometimes by the minute. An asset that is pegged to a more stable currency or asset can give buyers and sellers the certainty they need that the value of their tokens won’t rise or crash unpredictably at any moment.
  • Trade and save assets. You don’t need a bank account to hold stablecoins, and they’re easy to transfer and exchange. Stablecoins can be sent easily around the globe, including to places where the USD may be harder to obtain or where the local currency is unstable.
  • Earn interest. There are easy ways to earn interest at a higher ROI than what a traditional bank would offer on a stablecoin investment.
  • Transfer money cheaply. The cost of transfer is in most cases less than a dollar, and you can even transfer millions of dollars with such low transaction costs.
  • Send internationally. Fast processing and low transaction fees make stablecoins like USDC the best choice for sending money anywhere in the world.

Written By

Petrache Ionut

May 27, 2022