Digital assets are one of the most popular technological advancements in the 21st century. With their revolutionary features, they have provided users with new means to process their transactions.
However, one thing about cryptocurrencies that make people hesitant to invest in their volatile nature. Since they aren’t tethered to real-life commodities like fiat, their value can experience periodic fluctuations that can result in big losses on the user’s end. This is where stablecoins come into play.
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What are stablecoins and how do they work?
Stablecoins are digital tokens backed by tangible assets such as gold or fiat money. They are intended to give investors an added level of security and stability by decreasing market volatility.
While it also runs on the blockchain, these types of tokens run on a different algorithm that secures their value and makes them less susceptible to market fluctuations. This enables users to buy and sell a reference asset-backed by real-world tokens without having to worry about the token falling into liquidation.
What are the different types of stablecoins?
To have a better grasp of stablecoins, it is vital to research the many different variations that have been created throughout the years. You may check them all out below:
The most popular kind of stablecoins is the ones collateralized or backed by fiat money. How this works is that the value of a single stablecoin is pegged after one unit of fiat currency, usually the US dollar.
Anyone who wishes to withdraw their asset will have their bank account debited from a reserve kept by the stablecoin’s management firm. Afterwards, the stablecoins’ counterparts are ‘burned’ which means they are permanently removed from circulation.
Stablecoins with fiat-collateralized stablecoins is among the most straightforward stablecoins to utilise because of their simplicity and low cost. So, people who are still starting with using these kinds of tokens will find them efficient and cost-effective.
As the name suggests, this type of stable is backed by digital assets and is more decentralised than their fiat currency counterparts. Usually, these tokens are over-collateralised, which means the required deposit should be at a higher percentage since they are prone to price fluctuations.
Usually, crypto-backed stablecoins can cost a bit higher than their counterpart because users have to pay extra charges for returning the stablecoins to the protocol.
Commodity-backed stablecoins are tokens pegged after real-life assets such as gold, oil and even real estate. Usually, these types of tokens are managed by central authorities. Among these reserves, the most common type is gold.
However, it should be noted that the availability of these tokens depends on the supply in the place of origin. For example, if a user wants to back peg his assets using gold but it’s hard to procure in his country, then it would not be an option.
Hybrid stablecoins, also known as algorithmic stablecoins, are tokens that employ advanced algorithms to keep a constant value by balancing the supply and demand for currency that is kept on the blockchain and managed through smart contracts.
Algorithmic stablecoins help to preserve the value of a currency against volatility in the market.
When the market price of a cryptocurrency falls below the value of a fiat currency, an algorithmic stablecoin mechanism decreases the number of tokens available for circulation.
Top stablecoins in the market
The crypto realm has numerous stablecoins and choosing which one suits you the best can be quite tricky. Check out some of the top-performing tokens below:
When it comes to stablecoins, Tether is one of the most popular available in exchanges. Launched in 2014, the USDT was created with the vision to provide more stability in the ever-changing crypto market by backing a 1 USDT to 1 USD ratio.
The Tether blockchain is layered on top of the Bitcoin OMNI protocol that enables the burning and creation of USDT-pegged BTC tokens. To cater to more users, it has also expanded to other blockchains such as Ethereum, TRON and EOSIO.
Dai is the first decentralised stablecoin backed by cryptocurrency by locking digital assets through the use of smart contracts. Introduced in 2015 by founder and CEO Rune Christensen, the DAI token became fully functional in December 2017. What makes this token special is that it can utilised cryptocurrencies such Ethereum, Basic Attention Token, USD Coun Wrapped Bitcoin and more as collateral.
What makes DAI even more appealing to users is that it provides cheaper transaction fees and its decentralised nature, allowing people to freely access and convert their funds.
Are stablecoins useful?
For users who are worried about the stability of their digital assets, stablecoins provide the efficiency of crypto but with more security in terms of fluctuations in value. Additionally, they are highly useful for people who have big crypto investments and want to shield their assets from market changes.
On the other hand, people looking to use them for day-to-day transactions will find it hard to find stores that accept stablecoins since the most common tokens accepted are Bitcoin, Ethereum and Ripple.
Invest now and grow your assets with stablecoins!
While stablecoins lessen the fluctuation of the asset price, it’s still important to know that they won’t guarantee instant returns with your investments.
Having the right strategies, along with careful research about the market is the ultimate key to seeing your assets flourish. With your newfound knowledge of stablecoins, you can now look for less risky ways to invest and enjoy crypto!
That being said, investing isn’t the only way to increase your cryptocurrencies! Playing crypto games here at Casino Days India can also be an avenue to grow your funds. See what our site has to offer when creating an account today!