What is a Stablecoin and Why Are There So Many Now?
In the rapidly changing world of cryptocurrencies, where volatility can sometimes go to the extremes, stablecoin is a phenomenon. Today, you can find a number of them in circulation.
The main question is what a stablecoin is and why there are so many of them now.
A stablecoin is a coin that is linked to a real asset, e.g., fiat currency, gold, or oil, and is launched on the cryptocurrency market to hold a stable value. This means that the price per coin unit in fiat doesn’t vary, but is traded at a stable value, which is not the case for altcoins as their price in fiat always varies.
For example, Tether (USDT), the most popular stablecoin, was launched to be traded for 1 USD per unit.
Each stablecoin is based on complex mechanisms, but all of them are meant to have a stable value.
As we already mentioned Tether, here are more stablecoin projects that are currently available:
- TrueUSD (TUSD)
- MakerDAO (MKR)
- Havven (HVN)
Types of stablecoin
Stablecoins can be generally divided into three groups:
- Fiat-collateralized stablecoins
This stablecoin type includes stablecoins backed by fiat currencies, such as US dollar, Euro, etc.
- Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are backed by other cryptocurrency reserves. Here, a pool of coins is created to back up the value of a stablecoin. Unfortunately, this type can be tricky as cryptocurrencies are always volatile.
- Non-collateralized stablecoins
This stablecoin type isn’t backed by anything, but its supply is governed by its smart contracts using algorithms, expanding or contracting to keep the value stable.
Stablecoin: the strengths
There are a number of stablecoins currently in circulation because of the obvious advantages these coins offer.
First, they are stable, which equals to stable trading. Second, it’s a purely psychological aspect. You trade and engage in transactions with peace in mind as you know that the value is stable and is protected from volatility.
Do stablecoins have any weaknesses?
Nothing is perfect, and neither are stablecoins. No matter how stable these coins are believed to be, their value has increased and decreased by about 10%. Not much, but it has changed. Fact.
In the case of non-collateralized stablecoins, there’s an issue of a coin not being backed by anything.
Stablecoins tends to be less decentralized than altcoins being controlled by one specific company, whereas the main idea of blockchain and crypto is decentralization.
Finally, stablecoins run into some blockchain-related oracle problems that are unsolvable at present.
To sum today’s blog post up, stablecoins are exciting. Given that blockchain oracle problems are removed, these coins are a great addition to the cryptocurrency market.
Have you used any stablecoins before? Tell us in the comment section below!
The CoinMetro Team