Every day it seems that a new stable coin is being made. I know a lot of you are like what are stable coins and why should I even care about them? One reason you should really care about stable coins are because they are pegged at the US dollar.
Meaning that stable coins are used to mimic fiat money, like the US dollar. If you’ve invested in centralized exchanges or decentralized exchanges you may notice the volatility of the markets. Meaning you cannot predict or time the markets it can go up rapidly or down rapidly.
So, to protect your digital assets, you will need to invest in something that is more predictable and reliable, like stable coins. Stable coins can be utilized in multiple ways to take advantage of navigating the crypto markets, I will do my best to give you the most valuable information regarding stable coins.
What Are Stable Coins?
Stable coins as stated before are utilized to be pegged at the US dollar, cryptocurrency, or some other commodity (gold, etc). The benefits as the name suggest, is stability against inflation or random up and down trends of the crypto market. Stable coins are the bridge between digital assets and the fiat world. In contrast to unpegged digital assets like Bitcoin, etc. Unpegged digital assets are exposed to volatility of the market. The top three stable coins according to Ethereum.org are: Tether, USDCoin, Terra USD. DIA and Binance USD are in the top ten.
How to get Stable Coins?
Buy Through Centralized or Decentralized Exchange, Swapping, and Gas Fees
Stable coins can be bought through a centralized exchange, need an overview of what this is hit the link. You would go to a centralized exchange like Coinbase and order the coin that you would like to buy. Another way to buy stable coins is through a decentralize exchange by swapping the digital assets you already have, such as Uni-swap. You would use ETH and swap for Tether, watch out for gas fees!! Depending on which you use, you may or may not be able to purchase the coin you want. Usually, centralized exchanges only back fiat or commodity stable coins.
Gas fees are how transactions are validated, done by miners. Gas fees are extremely high when the ETH Blockchain is congested or overworked, so timing the network when it is not that busy is the key to getting a good deal in the markets. Gas fees also depend on the blockchain you utilize for transactions, some can be a lot cheaper than the ETH Blockchain. Some blockchains do not utilize miners for approving transactions. Usually called proofs, proofs are just how transactions are validated on the blockchain, there is more in-depth information, but this is the basic knowledge needed.
You can earn stable coins if you really know your stuff in open-source applications. You can do work for certain Dapps (Decentralized applications) and be paid in stable coin. This is not me, but for the lucky ones out there who know how to speak to computers, Gitcoin bounties is like a freelancer website for software engineers or computer programmers, to earn on.
You can borrow to earn stable coins. To do so you would need to utilize DeFi applications. DeFi applications would allow you to lend ETH or other tokens as collateral, for the potential to earn stable coin tokens as your rewards. You will need to manage the loan due to price drops within the market, so if ETH price drops, then you will need to add more ETH for collateral. If you cannot cover the cost, you will face a penalty. Borrowing can be more of an advance tactic, so make sure you understand all aspects of lending and borrowing.
Why Get Stable Coins and Benefits
Protect against Volatility
As described before stable coins allow those within the crypto market to protect against volatility. I believe it allows one within the crypto markets to diversify their crypto portfolio because those stable coins are backed or pegged by other cryptocurrencies and commodities. Especially with the unpredictability of the markets, it would be wised to find another way to keep your digital assets from being harmed by the current bear (down) markets.
You can also save with stable coins, by providing your stable coins through staking (a process to lend your tokens to be used for improving the blockchain or other applications) one can gain interest on these coins. Buy and hold, has always been beneficial in creating financial wealth, if you know markets are volatile then why not just save your digital assets for another day and gain interest while doing so.
Trading and Transferring
Using stable coins for trading in the crypto markets can be extremely beneficial. It is way cheaper to trade stable coins with less fees as compared to cryptocurrency assets like ETH due to gas fees. It is also easier to transfer stable coins since they are backed by fiat and other commodities, stable coins can be transferred internationally due to fast processing and lower fees.
Cons of Stable Coins and Conclusion
Stable coins are backed by reserves that make it stable, but essentially this makes stable coins like private money, which means, companies own these reserves to make these coins stable. For instance, Tether is back by money, so $1 equals $1 worth of the USDT coin. Therefore, these stable coins can be audited. In addition, the coins may not be as “stable” if the company does not have the reserves or cannot produce the reserves, which means fraud, security issues or the potential to lose money. Nothing is guaranteed.
The US Government are particularly interested in regulating stable coins. The reasons mentioned above hold a lot of weight in why US Government would like to regulate. Regulation means that a lot of the reasons for utilizing these coins could change. Also, stable coins have been the motivating factor in central bank digital currency or CBDC. The CBDC would allow the Fed to make a new digital asset for the US.
I will admit that regulation could be a good thing to prevent fraud and have more people involved in cryptocurrency on the centralized side. But in any case, understanding stable coins and how to utilize them can be beneficial for protecting and gaining more for your digital assets/ portfolio. All the best and continue to learn in order to prosper.