A stablecoin is a cryptocurrency that is designed to maintain a fixed price. It does this by being backed by assets, such as a fiat currency, or by collateralizing other cryptocurrencies. The idea behind them is that they can be used as an alternative to traditional currencies, which are subject to inflation and other issues.
There are three main types of stablecoins:
- Fiat-collateralized stablecoins:
Fiat-collateralized stablecoins are a type of cryptocurrency that are backed by a fiat currency. They are often pegged to the value of the underlying asset, such as the US dollar. Unlike other cryptocurrencies, fiat-collateralized stablecoins do not require proof of work or a blockchain to function. Instead, they leverage an existing financial system to back their value and stabilize it against risk factors like inflation or deflation.
- Crypto-collateralized stablecoins:
Crypto-collateralized stablecoins are digital currencies backed by other cryptocurrencies. The value of the stablecoin is pegged to the price of a basket of the underlying cryptocurrency’s value. Because they are tied to another cryptocurrency, they are always liquid and can be used in any case where you would use that other cryptocurrency.
- Algorithmic stablecoins:
Algorithmic stablecoins are a new kind of cryptocurrency that use algorithms to keep their price stable. Therefore algorithms control their supply to keep the price stable and this has resulted in a new wave of stablecoins, one of them being USDB. They are designed to be more secure and stable than other types of stablecoins, and also have all of the benefits of a cryptocurrency, including anonymity and decentralization.
Despite the fact that all of these stablecoin types differ, they all share one goal in common: to keep the price of the coin steady, usually at 1 dollar
Stablecoins offer many benefits to users due to their ability to ignore price movements within the volatile crypto market. Therefore holders of stablecoins don't need to worry about market fluctuations towards the downside and merchants don't need to worry about their incoming payments being worth less than what they should be.
One of the biggest advantages of stablecoins is that it allows users the ability to earn passive income from staking without the risk of the price of the asset decreasing. This is the case with many tokens as they can be staked and yet the price of their token may decrease during the staking period resulting in little to no profit. This makes stablecoins attractive to investors that want a low risk asset that guarantees returns. The next time there is a bull run, you should consider investing in a stablecoin that can be staked so that when the next bear market arises, your profits will be safe and you will make passive income that will be protected against potential downward price action. USDB offers a 30% ROI in its staking which can be considered a huge return in any asset class.
Another benefit of stablecoins is that they remove volatility from the equation when making purchases. For example, if you buy a product in Bitcoin and the price drops shortly after, then you're not going to be able to use your Bitcoin for anything else—you've lost money on your purchase. With a stablecoin like USDB, though, you can buy things with confidence that you'll get what you paid for. This is important because in order for the mass adoption in crypto for payments, merchants and consumers need to be confident that they are receiving the amount that they are meant to.
Here are a few more benefits of stablecoins:
- Can be used for payments and transactions
- Can be used as collateral for loans
- Easier to store than other cryptocurrencies
- Low fees when sending
- Offers protection to traders during market volatility
To conclude, we hope that you learnt a thing or two about stablecoins and that you can use this information to help keep your portfolio in the green.