Getting To Know Stablecoins In Crypto: Understanding, Use, And Type

JAKARTA Cryptocurrencies are not only Bitcoin, Ethereum, Dogecoin, and others known for their extreme price fluctuations. On the other hand, the crypto world also has stablecoins or stable cryptocurrencies because their value is tied to other assets such as USDT, USDC, DAI and the like.

As the name implies, stablecoins are also stable following the movement of fiat money prices or other assets. Therefore stablecoins provide a number of benefits including price stability and non-volatile. This is usually an alternative for traders and investors to save their funds when the market plummets.

Definition of Stablecoins

Stablecoins are cryptocurrencies that have stable price movements because their value is pegged to fiat, gold, and even to other cryptocurrency reserves.

In most cases, most stablecoins are pegged to widely used fiat currencies such as the US Dollar or Euro. Some are pegged to commodities, such as Gold.

The Use of Stablecoins

For many cryptocurrency traders, stablecoins serve as bastions to escape when they want to hedging their crypto portfolio without cashing it into fiat. This is particularly effective especially during the bear market or to keep profits in FIAT value. However, the world's daily currency is still fiat and not Bitcoin or Ethereum.

Stablecoins also tend to be an important component in decentralized finance (DeFi). DeFi presents an alternative to existing financial systems with systems built on public blockchains.

This idea has recently become popular and there has been a severe increase in projects developing attractive products, such as peer to peer loans. If DeFi wants to thrive, stablecoins will undoubtedly play an important role as people will need volatility-free means to transact with each other, without losing the benefits of cryptocurrencies.

Type-Types Stablecoin

In a rather broad categorization, there are three types of stablecoins that can be identified.

This stablecoin is supported by 1:1 by fiat currencies, which are stored in bank accounts. Examples: Tether (USDT), USD Coin (USDC), Gemini USD (GUSD), Binance USD (BUSD) and so on. They are centralized because they are launched and regulated by central organizations, which can be in the form of companies, banks, or even governments.

It's a relatively new type of stablecoin that doesn't have a central operator but is governed by a user consensus that takes part in the network.

For example here is the stablecoin Maker DAO, DAI. Users can lock down a number of cryptocurrencies, such as ETH, as collateral to borrow DAI, which is pegged to the US Dollar.

It's still relatively new. They don't have any guarantees that support their systems, and they rely on algorithms to keep prices stable. For example, the algorithmic stablecoin launched by TRON, Decentralized USD (USDD).