What is a stablecoin?
A stablecoin is technically a utility token built depending on another coin blockchain. The entire goal of a stablecoin is to create a cryptocurrency that is not volatile and doesn’t change the price. Stablecoins offer the convenience privacy and security of crypto offering stability and trust in fiat money.
A stablecoin should pack to the US dollar and always should equal $1. The first cryptocurrency Bitcoin was created with the target of storing the value but it was not widely adopted, the price fluctuates a lot. So much so, it is classified as a speculative investment. If you want to store money using crypto technology but you don’t want your investment into price fluctuations, you can use a trusted stablecoin
Stablecoin
If you want to know the stablecoin deeply you first need to know about the differences between a centralized exchange and a decentralized exchange. A centralized exchange is an exchange that is owned by one entity like Binance but they allow you to buy and sell different types of cryptocurrency. Technically they are regulated by the government.
On the other hand, a decentralized exchange is not run by a company instead of they are run by a code. Changes in the exchange only happened when the code is changed. In its decentralized nature, the government cannot regulate or even shut down.
Using stablecoins you can trade in Ethereum to stablecoin, then stablecoin to Bitcoin, then Bitcoin to stablecoin. Whenever you want to use a decentralized exchange you don’t have to pay more fees, don’t have to wait a long time for transactions, and don’t have any risks of government tracking or canceling your transaction.
Advantages of stablecoin
For example, let you purchase Bitcoin for $100. If the Bitcoin price increases you may convert that into a stable coin and wait to buy it back lower Bitcoin price. With the stablecoin, you can able to earn interest on your Crypto assets because you don’t have to worry about price fluctuations. 30% of an APR in Ethereum, it is no matter if Ethereum’s price drops by the same percent. However, 30% APR in USDC stablecoins is delicious and it’s a good matter.
How do stablecoins works?
Stablecoins mainly works in two ways,
Collateralization :
Fiat collateralization means that each coin is backed by something in most cases that is one US dollar. The most famous company Tether realized their USDT stablecoins using fiat collaboration. Fiat collateralization stablecoins are quite stable much more of an alternative.
Problems:
- The money required to put off each USDT cannot be invested. This can be the millions of dollars of their company are not earning interest
- Another problem is specifically the trader’s faces, it is very difficult to prove that you own the total matter of assets
Stablecoins Smart Contract
Smart contract stablecoins are usually much more volatile. They must manipulate the supply of coins to adjust the price. their main algorithm works in stablecoin.
How to buy stablecoins?
Stablecoins are buying and selling in an exchange both centralized and decentralized. It is very easy to buy a Tether, USDC, or DAI in a centralized exchange like KuCoin or Gemini. Another method you can buy some Ethereum make trade into USDT and transfer them to a decentralized exchange like Uniswap.
Risks of stablecoin
Before investing your asset into a stablecoin you have to know that there has a lack of insurance. When you pay your money into a bank account or checking account that is secured by the government. Some banks in the USA are FDIC Insured which means you will pay up to 250,000 US dollars if your money is lost or stolen. In stablecoins do not have this benefit. If the stable company has bankrupt you lost all of your investment.
Conclusion:
Stablecoins are a great advancement of cryptocurrency. At the current moment, if you want to put your money into them, I recommend you to always go for your own research.