Cryptocurrency prices fluctuate all the time. Big rises or deep falls always attract attention, but even in “quiet” markets, the price of cryptocurrencies changes every second. Except for stablecoins: cryptocurrencies that are designed to keep their price always paired with another asset. For example, the US dollar, as in the cases of DAI, USDC and USDT.
A stablecoin is tied to a reserve asset, also known as a fiat currency. Its name comes from the fact that, unlike other cryptocurrencies, its value will be the same as that of the currency to which it is pegged. The most common and used are pegged to the US dollar. The best known are USDT, USDC and Binance USD.
Another concept that ties into this topic is “peg,” which stands for a cryptocurrency’s parity to a fiat currency or another asset. These stablecoins have been a huge leap forward in crypto adoption because they are so convenient for making payments and being able to save without having to expose yourself to the volatility of other cryptos like Bitcoin or Ethereum. They provide an easy, fast, efficient, borderless, and stable way to transfer value on the blockchain. Decentralized stablecoins add transparency and censorship resistance to this entire list of benefits.
Types of Stablecoins
FIAT-collateralized: This means that they maintain a 1:1 peg to the US dollar and are backed by reserve assets. For example, for every USDC in circulation, there must be one US dollar in reserve.
Collateralized by CRYPTO: For example, DAI maintains a 1:1 parity with the dollar but is backed by other cryptos such as Ethereum.
ALGORITHMIC Stablecoins: In this case, a smart contract automates and executes agreements, regulating the circulation of these stablecoins based on the price of the currency.
Advantages of Stablecoins
Among the advantages of using stablecoins, we can highlight:
- They eliminate the price volatility of other cryptocurrencies.
- They allow value to be transferred without geographical borders, at any time of day and with low commissions.
- They operate on secure, private, censorship-resistant networks.
- They can be exchanged for traditional money or other cryptocurrencies.
- They are very useful for those who do a lot of trading.
- They are one of the assets that can provide the best returns in staking.
- They allow you to protect yourself from market crashes.
What are the most used stablecoins?
USD Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and DAI are the four most widely used stablecoins, all with their price tied to the dollar. They are also among the top 15 cryptocurrencies by market capitalization, a key indicator for understanding the importance of a token in the ecosystem.
Stablecoins are gaining increasing popularity not only in the trading arena, but also in the world of decentralized finance (DeFi). They are used to generating yields through lending and staking, and are starting to be adopted by businesses for cross-border payments due to their efficiency and low cost.
In the future, stablecoins are expected to play a crucial role in the mass adoption of cryptocurrencies, facilitating a smoother transition between the traditional financial system and the new digital ecosystem.
© 2024 Cryptopress. For informational purposes only, not offered as advice of any kind.
