What are Stablecoins?

Stablecoin - The definition 

Stablecoin, the name is quite self-explaining, isn't it? A Stablecoin is a type of cryptocurrency whose value is linked to an asset like the U.S. dollar, Euro, commodities or algorithms, in order to stabilize the price. Most of the stable coins are there to mimic the value of fiat currencies (those issued by the governments of different nations), which can be traded on cryptocurrency exchanges. If we say more particularly most stablecoins mimic the value of U.S. Dollar.

Stablecoins are designed to manage the price swings of cryptocurrencies like Bitcoin or Ethereum. Stablecoins are also used to trade other cryptocurrencies. Stablecoins, leverage the benefits of cryptocurrencies, such as transparency, security, immutability, digital wallets, fast transactions, low fees, and privacy, without losing the guarantees of trust and stability that come with using fiat currency like the US dollar or Euro.

The stablecoin universe has reached nearly $40 billion in supply and, in January 2021, monthly transaction volume exceeded $200 billion. In countries like Brazil, many people are turning to stablecoins as an alternative to their national currencies in uncertain economic conditions. Many others are using stablecoins as a nice way to cross-border transactions.

Stablecoin History

The initial stablecoins BitUSD and NuBits were released in 2014. They were collateralized through other cryptocurrencies instead of fiat assets. The world’s first stablecoin BitUSD was released on 21 July 2014 and issued as a token on the BitShares blockchain. The next stablecoin, NuBits, released in September 2014. And the most widely used stablecoin Tether, reflecting the price of U.S. Dollar, was launched in 2015 on Bitfinex, through that the concept of collateralized off-chain stablecoins, backed by real assets, took off.

Types of Stablecoins

There are three types of stablecoin: fiat-collateralised, crypto-collateralised, and commodity-collateralised stablecoins.

Fiat-collateralised stablecoins mimic the values of fiat currencies issued by governments across the world, for example Tether (USDT) is used to mimic the value of U.S. Dollar. The crypto-collateralised stable coins are pegged to the values of certain cryptocurrencies, for example DAI is a stablecoin which is pegged to the value of ethereum. Commodity-backed stablecoins are stabilized with hard assets such as gold or oil. The most commonly used asset to collateralize stablecoins is gold. Paxos Gold is an example of a commodity-backed stablecoin.

An another type of stable coin is also there, it is Algorithm based stablecoin. Algorithmic stablecoins are the most controversial ones as they utilize algorithms to control the stablecoin’s money supply, similar to a central bank's approach to printing and destroying currency. Algorithm-based stablecoins are a less popular form of stablecoin.

Criticism of Stablecoins

Tether, the largest stablecoin by market capitalization, has faced accusations of being unable to provide audits for their reserves while continually printing millions; many have attributed their unverifiable creation of new coins to Bitcoin's rise in price in 2017. Stablecoins can be prone to failure as well due to volatility and upkeep required in many cases.

How to make money from Stablecoins

There are quite a lot of ways to make money with stablecoins, you can: Earn interest on your stablecoins, Lend your stablecoins, Stake your stablecoins.

Holding your money in stablecoins on a cryptocurrency exchange is a low-risk way to make money by earning interest on stablecoin balances. Earn interest on your stablecoins. This can be done by simply opening an account with a cryptocurrency exchange and accruing daily interest on your holdings. Many of these exchanges have no minimum balances and few fees.

Investing in a stablecoin backed by a precious metal such as gold, for example, is similar to investing in gold. If the value of gold increases, the value of the commodity-backed stablecoin increases as a result. Lend your stablecoins. Another way to earn money through stablecoins is by lending them out to borrowers.

Stake your stablecoins. You can also earn money through a process called staking. Staking involves participating in maintaining the flow of the blockchain network on a certain asset. In return, you are compensated by earning income from the network. The staking process is similar to depositing money in a savings account.

Closing thoughts

According to Binance, although they have some disadvantages, stablecoins are a critical component of the cryptocurrency markets. Through a variety of mechanisms, these digital currencies can remain more or less steady at set prices. This allows them to be used reliably not only as mediums of exchange, but as a safe haven for traders and investors. 

While allotting a small portion would do little harm, diving deep might leave you stranded with losses. Give your fair share in understanding the features and working on each one before investing because, unlike the regular instruments, these are entirely different.