what are stable coins anyway? compared to non-stable coins they are, as the word says, stable. Stable coins offer many advantages over non-stablecoins. You can use them for trading so you don't have to worry about volatility. It is also useful for shops and merchants to use as an accepted payment method.
Now we are going to talk about the differences between certain stable coins. And where stable coins are linked to which ensures that they remain stable. For example, the coins can be linked to gold, the dollar or other types of raw materials. But you also have coins that are stable but are not linked to the dollar or a commodity.
What do you use stablecoins for?
Stablecoins are most commonly used during trading in order not to have to trade your coins back into fiat money. You can continue trading like you are used to. You are therefore not have to dependent on a bank. Most importantly, these coins are stable so they don’t fluctuate.
for example you want to trade BTC then you do this for example with USDT to have a stable currency to not lose the profit you make in a bear market.
Stablecoins are also used in the DEFI world. For example, DEFI offers the advantage that this system is built on the blockchain. And that you can receive more interest than with traditional agencies. Stable coin will play a big role as the guest to DEFI. Because if you want to borrow money, for example, it must be stable and not worth hundreds of dollars less the next day. But also because people want their crypto to remain stable while they are on strike for interest.
Here you will find a comprehesive list of stable coins: https://defiprime.com/stablecoins
What types of stablecoins are there?
You have stablecoins backed 1:1 by fiat money. These are for example: Tether (USDT), USD Coin (USDC) and Gemini USD (GUSD). These coins are issued by a central administration.
For example the website of USD Theter states the following:
Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD? is always valued by Tether at 1 USD.
So you also have Stablecoins that are 1:1 supported by other types of crypto. You should think of Maker DAO - DAI for example. You can then, for example, give Ethereum as collateral for lending out DAI. DAI in turn is linked to the USD dollar.
For example the website DAI states the following:
The Dai stablecoin is a decentralized, unbiased, collateral-backed cryptocurrency whose value is soft-Pegde to the US dollar.
Dai is held in digital wallets and supported on Ethereum and other popular blockchains. All circulating Dai are generated from Maker Vaults and are backed by a surplus of coleterral assets.
You also have coins that create stable coins by an algorithm. As a result, they are not linked to anything at all. So there is no collateral at all. You should think of Ampleforth.
The website of Amplefoth states the following:
The number of AMPL you own can change each day. The AMPL protocol automatically adjusts supply in response to demand. When price is high, wallet balances increase. When price is low, wallet balances decrease.
Finnaly you also have a stablecoin that is backed by an asset like gold. This coin has the name digix. One Digix equals 1 gram of gold. And so it remains stable against the gold price.
What are the benefits of stable coins?
Stablecoins will, in my opinion, play a very important role in the future. Because you can easily make payments worldwide. Without having to deal with intermediaries. Payments cannot be blocked and are anonymous to some extent.
For example, the shipping costs are very low if you send a stablecoins to the other side of the world. If you compare it with traditional payment transactions between banks, you pay a fee that is often high.
Sending stablecoins is much faster than with traditional payment transactions. Traditional payment traffic is subject to many rules and is outdated. For example, they must comply with anti-money laundering rules. With stablecoins, the transaction does not take days but minutes. In general, it goes very quickly.
Transactions made via the blockchain are transparent and can therefore be followed by everyone. I don't know if this is an advantage. Because your privacy is more at stake. But it can also be an advantage if people are actually looking for transparency.
Stablecoins are stable so that they are very safe in terms of price stability. And can be so easily used as payment between people and companies
What are the drawbacks of stable coins?
Many well-known stablecoins have been centralized. This is a deadly sin for many crypto enthusiasts. Because through this centralization, management of the currency lies with, for example, a company or a group of people. Due to the centralization, it is not an option for many crypto enthusiasts to use it. Not all stablecoins are centralized, for example DAI.
It is also the case that stablecoins are not regulated by law. There are rules, but not such rules that apply to fiat money. So you can imagine that stable coin are not as well protected as fiat money.
Final thoughts
The full parts of stablecoins can no longer be ignored in the crypto space. They have made a link between the fiat money and the crypto world and this link will only get stronger. Because you can secure your crypto via stablecoin so that your profit or crypto remains stable in price.
But it is always important to remember that stablecoins can also pose a danger. Because if you are too dependent on a stablecoin and this crypto crashes then you have a big problem. It is therefore not the case that a stablecoin cannot crash or lose its value. Be aware of this if you are going to use a stable coin.
It would be best to have a regulated stable coins. So that if things go wrong you can fall back on certain rules. These rules can make it easier and limit the damage.
If you have any qeustions or feedback please feel free to address me in the comments.
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I'm not giving any financial advice, this is just a blog for more information.
A few easy steps to keep your crypto safe:- Never give someone your 12 / 24 passphrase!
- Never give someone your private keys!
- Not your keys not your coins!
- Just don't send any coins to strangers that ask for coins to double your investment!
- Don't use a centralized exchange as a wallet!
- Don't use centralized exchanges if this is not required!
- If you send your coins or tokens think twice before doing so!
