Let’s talk about another interesting topic “stable coins”.
Stablecoins are cryptocurrencies with constant value and are linked to specific assets, providing a more stable and predictable value compared to cryptocurrencies like Bitcoin or Ethereum. They come in various varieties with unique stability-maintaining mechanisms, including fiat-collateralized stablecoins backed by fiat currency and maintained in bank accounts.
What are these coins? What is the significance? What is its types and varieties? We will put lights on all these important questions arised in our minds.
Stablescoins that have been “crypto-collateralized”
These stablecoins are supported by a reserve of other cryptocurrencies. Stablecoins are created in exchange for users locking up a particular quantity of cryptocurrencies (like Ether or Bitcoin) as collateral. To preserve stability, the value of the collateral must be greater than the value of the stablecoins released. An illustration of a crypto-collateralized stablecoin is DAI, which was released on the MakerDAO platform.
Stablecoins backed only by algorithms rather than physical or digital assets are known as algorithmic stablecoins. Instead, they rely on algorithms and smart contracts to manage the stablecoin’s supply and demand in order to keep its price stable. An example of an algorithmic stablecoin is Ampleforth (AMPL).
Reduced volatility: Stablecoins offer a less erratic alternative for users and investors who wish to steer clear of the price swings sometimes connected to other cryptocurrencies.
Faster transactions: By acting as an intermediary currency inside the bitcoin ecosystem, stablecoins can be utilised to facilitate speedy and affordable transactions.
Stablecoins allow traders to hedge against market volatility without having to exchange their holdings for fiat money.
Application access to decentralised finance (DeFi)
Stablecoins are frequently used in DeFi platforms for lending, borrowing, and yield farming, supplying the ecosystem with liquidity. It’s important to keep in mind, though, that stablecoins do carry some risk.
Concerns include the centralised management of fiat-collateralized stablecoins (reliant on a reliable custodian), the risk of insufficient collateral in crypto-collateralized stablecoins during severe market downturns, and the difficulties in preserving stability in algorithmic stablecoins.
Before adopting any stablecoin, consumers should learn about its unique characteristics, workings, and hazards, just like they would with any other investment or financial tool.