A stable coin is a form of crypto whose value is tied to another class of asset like gold or fiat currency, to stabilize the price.
Cryptocurrencies like ether and bitcoin offer multiple benefits as it does not require trust in any intermediary institution for sending payments to anyone and anywhere. But one of the major drawbacks is that the prices of cryptocurrencies are not predictable, and they have a tendency to fluctuate, and does that wildly.
This is why it is not suitable for everyday use. Generally, people expect that they will know the amount their money will reach in a week from the time of investment.
What Are Stable coins?
Stable coin is a cryptocurrency whose value is ranked to another currency, financial instrument, and commodity. Stable coin aims to give an alternative to most of these popular yet unstable cryptocurrencies, like BTC or Bitcoin. Which has somehow made cryptocurrency investment a lot less suitable for making any common transactions.
Why are stable coins important?
The USDC stable coin, for instance, is supported by dollar-dominated assets that have at least equal value to the USDC that is circulating in segregated accounts with the financial institutions that the US regulates. An independent accounting firm attests to these accounts.
Like the other stablecoins, USDC operates the Ethereum blockchain. Stablecoins are mostly free from the volatile cryptos. However, they inherit some of the most powerful properties.
- Stable coins are generally open and global. It is accessible to everyone on the internet, 24/7
- They’re cheap, fast, and secure to transmit
- They are programmable and native to the Internet digitally
What Are The Functions Of Stable coins?
- Reduce volatility – The value of Ether and Bitcoin fluctuates a lot, and sometimes it does by the minute. An asset that has tied up to a stable cryptocurrency gives sellers and buyers the certainty that the token value will not crash or rise in the coming future unpredictably.
- Save assets – You do not require a bank account to hold the stable coins, and they are also easy to transfer. The value of stable coins can be sent around the globe easily. This includes places where the U.S. dollar is hard to obtain or even in places that have unstable local currency.
- Earn rewards – There are a lot of ways to get rewards when you invest in stable coin.
- Transfer money cheaply – People have made transactions in USDC that are worth a million dollars, and the transfer fee is less than even a dollar.
- Send internationally – Low transaction fees and fast processing make stablecoins a good choice for sending money all throughout the world.
What Kinds Of Stable coins Are There?
Some would say that stable coin is a solution that is looking for a problem. As a result, it has given wide acceptance and availability of the U.S. dollar. On the other hand, many believe that the central banks will not control digital tenders in the future. Based on the mechanism used for stabilizing the value, there are three different forms of stablecoins.
Fiat-Collateralized Stable coins
The Fiat-collateralized stablecoins have a reserve of a fiat currency like the U.S. dollar, assuring the value of stable coin as collateral. Other collateral include precious metals like silver and gold, along with commodities like crude oil.
Independent custodians maintain these reserves and regularly audit them. TrurUSD and Tether are some of the popular stablecoins in the USA.
Crypto-Collateralized Stable coins
Other cryptocurrencies mostly back crypto-collateralized stablecoins. The reserved cryptocurrencies could have a high chance of being unstable. Hence, they are overcollateralized. In other words, the value of cryptocurrency held in the reserves is more than the value of the issued Stable coins.
Algorithmic Stable coins
Algorithmic stablecoins can or cannot hold the reserve assets. The primary aim is to keep the value of the stablecoin stable using an algorithm.
In a few ways, it is not much different from the central banks, meaning it does not rely on reserved assets to keep the value of the issued currency stable. The only difference is that any central bank, like the U.S. Federal Reserve, sets the monetary policy publicly depending on the well-understood parameters. As the issuer of the legal tender, its status does wonders for the policy’s credibility.
Stable coin Regulation
Stablecoin falls under scrutiny by regulators, given their growth, they rapidly saw around the 130 billion dollar market, and it also has the potential to affect the broader financial system. The IOSCO said in October 2021 that Stablecoins should be regulated as the infrastructure of the financial market along with clearing houses and payment systems. These rules focus on those stablecoins that the regulators deem as systematically important, and have the potential to disrupt the settlement transactions and payment.
How Does Stable coin Work?
Stablecoins make an attempt to tie their market value to several external references, mostly a fiat currency. Compared to other volatile currencies, these are more useful as an exchange medium. They are pegged to currencies like the U.S. dollar or to the price of any commodity like gold or use an algorithm to manipulate the supply. They also maintain the reserved assets as collateral. Subsequently, they control the supply through algorithmic formulas.
Which Is The Best Stable coin?
The largest and most popular stablecoin by market capitalization is USDT or Tether. The coin is tied to the U.S. dollar in a ratio of 1:1. By market cap, it also comes in the top five cryptocurrencies. On the major crypto exchanges like Coinbase, Kraken, and Binance, you will find Tether.