Posted Feb 07, 2024
STABLECOIN - IMPORTANT FACTS YOU NEED TO KNOW ABOUT THIS CRYPTOCURRENCIES
Stablecoin - Important Facts You Need to Know About This Cryptocurrencies
Holding money in a stablecoin on an exchange has its pros and cons. In this article, read a little more about this very interesting topic.
A stablecoin in the cryptocurrency world is a type of digital currency that is designed to maintain a stable value against other assets, usually against some fiat currency such as the US dollar or the euro.
BASIC TYPES OF STABLECOINS
There are two basic types of stablecoins: fiat-backed and algorithmic.
Fiat-backed stablecoins are tied to some sort of collateral, such as physical gold, US dollars, or some other cryptocurrency.
These stablecoins ensure their value stability by having their prices linked to the value of their collateral, meaning that if the value of the collateral rises or falls, the value of the stablecoin will also change.
On the other hand, algorithmic stablecoins seek to maintain price stability through algorithmic processes and mechanisms.
They do not use any form of collateral, but instead depend on automated protocols that adjust the supply of stablecoins to maintain price stability.
One way to do this is by manipulating the supply and demand of stablecoins through a process called “minting” and “burning”.
It is important to note that algorithmic stablecoins are often more subject to high volatility and higher risk of price fluctuations compared to fiat-backed stablecoins.
Value stability is achieved in several ways, but the most common way is through the use of collateralization – that is, the stablecoin issuer holds a certain amount of assets, such as cash, securities or other cryptocurrencies, that guarantees the value of each stablecoin that is issued.
For example, for each stablecoin issued, the issuer could hold US$1 in cash or securities to ensure stablecoin price stability against the dollar.
Algorithmic stable cryptocurrencies may or may not hold reserve assets.
Their primary difference is in the strategy of maintaining the stability of the value of a stable cryptocurrency by controlling its supply using an algorithm, basically a computer program that executes a preset formula.
Stablecoins are often used in the crypto-world as a way to trade cryptocurrencies without exposure to large price fluctuations.
They are also used to transfer money between different exchanges or to buy other cryptocurrencies without exposure to high risks.
MAIN TYPES OF STABLECOINS
Cryptographic backed stablecoins: This type of stablecoin is backed with another cryptocurrency such as Bitcoin or Ethereum.
Fiat backed stablecoins: This type of stablecoin is backed by a fiat currency such as the US dollar or the euro.
This means that for every stablecoin issued, an equivalent amount of fiat currency is held in reserve.
Algorithmic backed stablecoins: An “algorithmic stablecoin” is a form of cryptocurrency that ensures its value stability through the utilization of algorithmic mechanisms, rather than relying on external assets for pegging.
Unlike conventional stablecoins that typically depend on external reserves, algorithmic stablecoins employ mathematical formulas and protocols to regulate their supply and demand dynamics.
The objective is to align their value with a specific benchmark, such as the US dollar.
Commodity backed stablecoins: This type of stablecoin is backed by some commodity such as gold, silver or oil.
For each stablecoin issued, an equivalent amount of the commodity is held in reserve to ensure value stability.
THE MOST POPULAR STABLECOINS
There are several popular and frequently used stablecoins in the cryptocurrency world, and some of the most famous are:
Tether (USDT) – Tether was the first stablecoin to appear on the market and is still one of the most popular and used.
Tether claims that 1 USDT is always equal to 1 US dollar and is backed by cash and cash equivalents.
USD Coin (USDC) – USD Coin is a stablecoin backed by the US dollar that was issued in collaboration with Circle and Coinbase.
USDC can be used on a number of different cryptocurrency trading platforms.
Dai (DAI) – Dai is a stablecoin issued by MakerDAO, based on the Ethereum blockchain.
DAI is created through collateralization with the Ethereum cryptocurrency, which allows users to obtain a stable coin that is not necessarily backed by the US dollar.
Binance USD (BUSD) – Binance USD is a US dollar-backed coin issued by Binance, one of the largest cryptocurrency trading exchanges in the world.
TrueUSD (TUSD) – TrueUSD is another US dollar-backed stablecoin issued by TrustToken.
TrueUSD can be used to trade cryptocurrencies on multiple trading platforms.
PROS AND CONS OF HOLDING STABLECOINS ON EXCHANGES
Holding stablecoin money on an exchange has its pros and cons.
The advantage of keeping your money in a stablecoin on an exchange is that you can trade cryptocurrencies quickly and easily, without the need to frequently switch between different wallets and exchanges.
Another advantage of stablecoins is that they are less volatile than other cryptocurrencies.
However, keeping money at an exchange also carries certain risks.
If the exchange is hacked or some other security breach occurs, your funds may be at risk.
Also, if an exchange goes bankrupt or decides to close its operations, your funds may be at risk.
To reduce the risk of losing your funds, it is recommend that you use reputable and reliable exchanges with a proven history of security.
Also, consider keeping larger amounts of funds in a cold (offline) wallet that offers a higher level of security.
In any case, you should be aware of the risks and do thorough research before deciding to hold your stablecoin money on an exchange.
It is important to note that there are many other stablecoins available in the market, but the ones listed above are some of the most popular and used in the world of cryptocurrency.