A simple explanation of stable coins
Stable coins are a particular type of cryptocurrency built on blockchain. Its value is linked to an asset class that is less volatile and has low-value fluctuations. Such examples are government-issued currencies or precious metals.
Bitcoin and other cryptocurrencies have various advantages. For instance, users don’t need an intermediary or external entity to manage transactions. Moreover, cryptocurrencies allow users to send payments across the globe in a much faster and efficient manner.
Recently, stable coins have become a topic of conversation among investors and regulators. Unlike Bitcoin and other cryptocurrencies, stable coins offer less volatility, similar to fiat or government-issued currencies. But they are providing instant processing and the security of cryptocurrencies.
Why do we need stable coins?
Swapping crypto with fiat currencies was initially unavailable on most exchanges. As an alternative, traders used stable coins to buy cryptos.
The usability of stable coins has increased over time. Unlike fiat currencies, stable coins are programmable and can work with smart contracts. Smart contracts are blockchain programs that can automatically trigger transactions when the terms and conditions of an agreement are met.
With smart contracts, users can use stable coins for trading and the entire DeFi ecosystem of lending, borrowing, insurance, and many more.
Types of stable coins
There are three types of stable coins:
1. Collateralized stable coins
These are the coins that are backed by some collateral. The collateral is held in a reserve which allows the token holders to redeem the coins for fiat or other assets.
2. Cryptocurrency-backed stable coins
These stable coins use other cryptocurrencies such as ETH as collateral.
Since cryptocurrencies are volatile, the cryptocurrency-backed stable coins use protocols to ensure minimal price fluctuation.
3. Algorithmic stable coins
There is no collateral backing algorithmic stable coins. Instead, these coins use consensus mechanisms and smart contracts to keep the price stable.
Popular stable coins
Also known as Tether, USDT is the first and most popular stable coin. It is a collateralized stable coin released on the Bitcoin blockchain. The value of USDT is pegged with the value of the United States Dollar (USD).
USD Coin is the second most popular stable coin. The Ethereum blockchain powers it. A collaboration between Coinbase and Circle launched it. USDC is also a collateralized stable coin, which is pegged with USD.
DAI is currently the fourth largest stable coin in terms of market capitalization. Maker DAO is its creator and regulator. DAI is algorithmically pegged with the value of USD.
4. Binance USD
BUSD is a collateralized stable coin pegged to the USD. It is created by Binance, the largest centralized cryptocurrency exchange (CEX) in the world.
Takeaway: Do stable coins have any future?
Stable coins are growing incredibly fast and becoming more and more popular. Big corporations like PayPal and Visa are allowing payments using stable coins. Stable coins are available 24x7, which removes the friction and hassle of currency conversion and hefty commissions while doing international transactions. The settlement time of stable coins is much faster as compared to USD or another fiat. Nevertheless, it is still a long road ahead for stable coins.
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