Stablecoins - The Most Reliable Crypto Asset
Stablecoins are essentially cryptocurrencies that aim to have a fixed value, which is often pegged to a fiat currency such as USD, GBP, and/or EUR. These coins are a valuable asset in decentralized finance as they offer no volatility. They are extremely useful for trading, storing value, and generating yield.
The reason why stablecoins are considered stable is because they tend to have a fixed value, which is, in most cases, the value of a fiat currency such as the USD. We all know how volatile cryptocurrency is. For the uninitiated, here is a very simple example that supports that statement.
As you can clearly see, the second biggest cryptocurrency by market cap, Ethereum, has seen a dramatic price decrease between September 28 and September 29 this year. This means that if you’d sold something using Ethereum just a day ago, then your profit would have become a loss quite quickly. Imagine paying for any product using Ethereum, or for that matter any cryptocurrency. You might be able to buy something with 1 ETH today, but to buy the same thing tomorrow, you might have to pay an additional 0.02 ETH.
And this is not just limited to larger cryptocurrencies like Bitcoin and Ethereum. This is applicable to even smaller sized crypto. In fact, the lesser known cryptocurrencies are known to be even more volatile.
And it is this volatility that makes it very hard for users to do constant transactions within the ecosystem. They don’t know when their asset’s value will drop, or when it will suddenly shoot through the roof. For this very reason, we need stablecoins.
How do stablecoins work?
When a protocol (a common term for projects in the crypto space) issues stablecoins, it does by ensuring that it has the exact number of the fiat currency in its reserves as the amount it issues in the first place. For instance, let’s say that a protocol A issues 10,000 stablecoins known as USDA. The value of 1 USDA = 1 USD.
Now when they issue 10,000 stablecoins that are each equal to 1 USDT, they must show proof that they have 10,000 worth of USD in their account. That is they must have 10,000 USD in their account. This is known as a collateralised form of stablecoin. As the name suggests, the protocol issuing the stablecoins shows that it has the exact amount of collateral for the amount of stablecoins it issues.
There are other types of stablecoins where the collateral is not a fiat currency but another cryptocurrency like ETH. And there are also algorithmic stablecoins that are wholly governed by their underlying code. These two types of stablecoins can be covered in a separate article.
Why stablecoins are a reliable crypto asset
Many reasons can be cited for this. The most prominent one, however, is the fact that they are safer to invest in. This is especially true for beginners who want to get associated with crypto but do not want to increase exposure to the volatility. They can, then, easily use any of the various stablecoins and lock them in a savings account that accrues higher yield.