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We've all heard the name stable coin before.
I was personally confused when I first heard the term a while back.
How could a crypto coin be stable?
Well,stable coins are that way because they are pegged to certain fiat currencies(such as DAI or USDT pegged to the US dollar) or certain assets such as gold,silver or crude oil.
These stable coins aim to be the price of the asset they are pegged to.
For example,at almost any given time,the USDT coin is always one dollar. It may be 1.01 or 0.99 dollars, but the price is generally around 1 dollar.
Now that we know what stable coins are,and what makes them stable, what are they used for? The reason investors place money in the cryptocurrency market is because of its volatility. So why bother with stable coins?
Well,stable coins have the following uses:
- They are used to counter the volatility of the crypto market: Imagine if Mark sells peanuts, and collects his pay in Bitcoin. He makes 0.001BTC every hour or so, and when he makes it,BTC is worth $8000. Well,Mark won't be very happy if BTC suddenly dropped to $3000 the next day. So stable coins are used to counteract this problem by remaining at a certain price all the time. But why can't Mark just take his pay in dollars? The answer to that question is in the next use case.
- They can be used on exchanges that do not support fiat deposits: Say Mark is a Brit,who lives in England. Obviously,there are basically no pound pairs on Binance,and Mark can't deposit his pounds in Binance. So he can use stable coin pairs which will allow him to use the money he makes from selling peanuts to trade cryptocurrencies on Binance.
- They could be used by investors who want higher trading volumes: Imagine if you're trading the BTC/NGN pair, whose volume is somewhere around 50BTC on Binance,and you would like to trade the BTC/USD pair. Well,since you can't change your NGN to USD on Binance,you could use a stable coin pegged to the US dollar,like the USDT which has a higher trading volume.
Alright. We now know the uses of stable coins.
But we also need to know the different divisions of stable coins.
They are divided into:
- Fiat centralised stable coins: These are stable coins backed by a fiat currency. They are very centralised and their price depends on how much of the given fiat currency the issuer of the stable coin has in his reserves.
- Crypto collaterised stable coins: They are pegged to other cryptocurrencies. "Hang on", you say. "Crypto isn't stable. How then are these coins stable if they're pegged to other crypto?" Well,the issuer of these coins has a strict set of protocols used to counteract the movements in the crypto they are pegged to. In other words,their value doesn't change ,despite the change in value of the crypto they are pegged to. A good example of this type is DAI.
- Non collaterised: They are completely centralised and are not backed by any collateral. They are literally the crypto equivalents of regular money. They operate the same way our fiat currencies operate,and are issued by a centralised body. They also have no definite number,and are thus made indefinitely.
So there you have it. Now you know what makes stable coins stable.
Thanks for reading and have a nice day.
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