You have probably heard a lot about stablecoins in your daily conversations. But do you ever wonder what differentiates stablecoins from other cryptocurrencies such as bitcoin and Ethereum?
Cryptocurrencies in general, have been widely considered as particularly volatile investment instruments since the very first day of their creation. They actually ‘are’ kind of volatile and thanks to all these price crashes and jumps, which somehow prevent cryptocurrencies from being used for everyday purposes, they are not considered ‘stable’. And that is exactly where ‘stable coins come in.
How do stablecoins work?
In theory, attaching a currency to a regular fiat currency prevents volatility. To put it simply, literally any currency that is pegged to a fiat currency such as the US dollar, Euro, Pounds, Rubles, or any other type of fiat which is relatively stable in terms of price, will not have big price swings.
What are stablecoins?
As mentioned above, stablecoins are cryptocurrencies that are nb simply backed b*y fiat currencies and that is mainly the only
thing that sets them apart from other crypto assets. Unlike bitcoin and Ethereum, following the fiat currency backing them, the prices of stablecoins remain steady.
Now you may ask yourself: What is the purpose?
Although stable coins lack the upside that top cryptocurrencies have to offer, they are still primarily used as stores of value, mediums of exchange, or units of account, BUT, in situations that volatile crypto assets are less desirable.
Why stablecoins?
The most important part: Why do some choose stablecoins over cryptocurrencies such as bitcoin and Ethereum?
Being backed by fiat currencies, stablecoins are designed to be stable over any period. As a result, they usually don’t fall in price, so investors can be confident that they can store value and they will always be able to sell their tokens with no risk of loss. That is why they are sometimes called “risk-off” or “risk-free” assets.
Stablecoins offer stability in a shaky market and are thus predictable. This predictability makes them work as a temporary shelter for investors that want their funds to stay secure during a bear market.
There are three main types of stablecoins:
Centralized stablecoins like Tether, the biggest and most popular Stable coin, which is backed by dollars.
Gold-backed stablecoins that are backed by investment-grade gold, like CACHE gold (CACHE) which is also among the most popular in the category.
Algorithmic stablecoins that balance on-chain reserves such as funds held in smart contracts to keep stable, like Ampleforth (AMPL).
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