April 29, 2021 by Walt
Cryptocurrencies have evolved over the past decade from a province of geeks to a multi-billion-dollar industry. Recently, the crypto sphere has seen a rise in innovative platforms and solutions inspired by Bitcoin and seeking to resolve the existing issues and implement new approaches. Stablecoins have become one of the most successful projects which considerably facilitated the process of using cryptocurrencies. They were introduced as a response to the problem of volatility of the crypto market with an intention to minimize the risks for investors. Today, the list of stablecoins’ functions has considerably expanded beyond their initial role and now includes trading and investing, which are particularly lucrative fields.
What is A Stablecoin?
So, what are stablecoins? Stablecoins emerged as a way for people to improve the chances of their crypto investments to retain value. Essentially, the majority of transactions that involve stablecoins occur due to a desire of individuals or companies to ensure a higher level of predictability. Stablecoins achieve their value reliability through a peg, also known as a fixed exchange rate, that is tied to an established instrument such as fiat currency or another cryptocurrency. For instance, Tether, the stablecoin which is commonly regarded as the most popular among investors, is backed by the US dollar.
This means that, in theory, the price of one Tether must always equal one dollar. In reality, stablecoins, similar to other crypto mediums of exchange, are constantly experiencing fluctuations, but in their case, such changes in price are quite negligible. This feature earned stablecoins a role of excellent stores of value for entities conducting crypto operations. Investors can turn to stablecoins in times of extreme market volatility and survive this period without the need to cash out and lose a considerable value of their crypto assets due to fiat conversion fees.
Stablecoins work in in the following fashion: an enterprise behind stablecoins creates a reserve for the asset, which functions as collateral for the coin. When a client buys one unit of the stablecoin, the enterprise must acquire one unit of the asset that backs it up. This reduces the capacity of a large number of stablecoin holders to cause the enterprise to go bankrupt if they simultaneously decide to sell their stablecoin funds.
Types of Stablecoins
As it was mentioned earlier, to make a stablecoin, one needs to find a proper asset that would serve as reliable collateral. Fiat-collateralized stablecoins are considered to be most common and are extensively used by different operators from crypto exchanges to banks. As it is clear from the name, these stablecoins are backed up by major fiat currencies. The aforementioned Tether is only one example. USD Coin is another stablecoin based on the US dollar, which is built on the Ethereum blockchain and governed by Centre, a consortium that sets policy, financial, and technical standards for stablecoins.
Crypto-collateralized stablecoins rely on a reserve of other cryptocurrencies such as Bitcoin. One of the examples of this type of stablecoins is DAI which is backed by ETH and runs on the MakerDAO protocol. DAI’s primary advantage is its decentralized nature since the value of this stablecoin is controlled by smart contracts rather than by one governing body.
Finally, there are also stablecoins which opted out of using collateral and instead integrated internal regulating mechanisms. Ampleforth (AMPL) is a stablecoin which is controlled by an algorithm that manages its supply to ensure that the coin’s price stays within the limits of one dollar.
Making Profits Using Stablecoins
A sure way to earn stablecoins is to accept them as payment. With NOWPayments, regardless of what crypto they pay you with, you can always choose to receive USDT, USDC or DAI, or any other stablecoin, and avoid volatility while still dealing in crypto.
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