They are designed to help ensure cryptocurrency keeps its value, even in market fluctuations. This article will explain how stablecoins work and differ from other cryptocurrencies. We will also give you tips for choosing the available stablecoins today.
What Are Stablecoins?
Stablecoins are digital assets designed to provide a long-term store of value. They can be used as a means of exchange or investment and are becoming increasingly popular among crypto investors.
The most notable stablecoin is Tether (USDT). USDT is backed by US dollars and pegged to the US dollar. It will always have the same value as one US dollar. Like other cryptocurrencies, a tether is an open-source blockchain platform with its native cryptocurrency.
Tether has been around since 2014 when it launched its initial coin offering (ICO). It raised over $2 million during its ICO, the most significant amount ever raised.
What Is The Purpose Of Stablecoins?
They act as a lifeboat for several traders who wish to hedge their crypto assets without cashing out in FIAT. This is especially useful during imperfect markets or to maintain profits in FIAT currency. After all, the world’s currency is still FIAT, not Bitcoin.
Stablecoins are also expected to be essential in decentralized finance (DeFi). DeFi offers a public blockchain-based financial system as an alternative to conventional financial institutions.
How Do Stable Coins Work?
When you buy a stablecoin, you purchase an asset like gold. Well, this asset can be traded online with various trading pairs such as USDC USDT or others. Moreover, you can also use this asset as collateral to get your crypto back when you want to convert it into fiat currencies like USD or EUR. This way, if the value of the stablecoin goes down—like when people start buying gold instead of USDT—you do not lose money on your investment because you have already used up that collateral to get your crypto back at a higher price than where it started at.
Here is all you want to learn about the procedure stablecoins like USDC work:
- The value of any given stable coin is directly tied to the value of fiat money held in reserve by the company that created it. If you buy USDC from your broker, you can expect them to have your funds safely until you want to move them around.
- You will get paid interest on your USDC tokens (up to 6%) each month. This helps keep them liquid and incentivizes people to hold onto their tokens instead of selling them for profit.
- Suppose a company offers USDC as an investment opportunity. In that case, it must report all transactions made with those tokens on a public ledger daily at midnight UTC—just like how companies must keep track of all trades made in Bitcoin or Ethereum.
Stablecoins are cryptocurrencies whose prices are backed by a reserve asset; This means that the price of a stablecoin is tied to the value of its reserve asset and remains consistent over time. This allows users to trade Csix to USDT thatworks in exchanges at fixed rates without worrying about price volatility. Using stablecoins, traders can avoid the risk associated with traditional cryptocurrencies and benefit from low transaction fees, fast processing times, and liquidity.
Stablecoins are not all made equal. While most popular stablecoins are supported by US dollars stored in regulated banking accounts, stablecoins with various stabilization procedures are also available.
Tangible currencies protect such stablecoins like US dollars and other government-issued money. They are nearly identical in value to the reserve fiat money. USDC, USDT, and BUSD are some examples.
Other cryptocurrencies have secured such stablecoins. They usually work similarly to a fiat-backed stablecoin, except that the reserve to ensure the stability associated with these tokens is in cryptocurrency. MakerDAO’s DAI is an example of a crypto credit history-backed stablecoin.
Unlike digital assets, these stablecoins rely on actual purchases like gold or other metals of value as reserves.
The most popular stablecoin is Tether, which has been called a “toxic asset.” Many people have called the company out for its lack of transparency, which has led to questions about whether or not it is worth anything. However, there are other options out there. One of the best options is USDC, a token backed by dollars that provides investors stability and security.