Stablecoin, what is it, let's define it

Stablecoin, what is it, let’s define it. Are stabelcoins cryptocurrency? Find out. Get a clear definition about them in a few lines.

Stablecoin, yes, stablecoins as a whole are volatility-free crypto-currencies, at least that’s the goal and it’s generally achieved, their price is supposed to stay fixed around $1, for example. They share much of the same power as other cryptos, but their value is stable.

Are they used a lot, do they matter in the world of cryptocurrency and decentralized finance?

In fact, even the major regulators seem to be talking about stable parts. Why is that? Simply because they are becoming an increasingly important part of the financial world.

The market value of Stablecoins backed by the U.S. dollar has surged over the past year, topping $100 billion in May, alarming regulators.

Stablecoin, what is it?

Crypto-currency prices tend to fluctuate wildly in a short period of time and people find this volatility exciting.

Let’s take bitcoin as an example. Its price can go up or down by 15-20%, even with a single tweet from billionaire Elon Musk.

Stablecoins are crypto-currencies without the volatility. They share the same powers as other crypto-currencies, but their value is stable, closer to that of a traditional currency, namely the US dollar, Indian rupee, etc.

With stablecoins, you can maximize your chances of protecting yourself from market fluctuations.

How do stablecoins escape the volatility seen in crypto markets?

There are two types of stablecoins based on collateral: stablecoins backed by a national currency and stablecoins backed by a crypto-currency.

Collateralized stablecoins are attached to another asset, such as the U.S. dollar. Their issuers guarantee the value of their coin by holding onto that asset.

Other stablecoins are tied to the price of crypto assets such as Ether or, in some DeFi applications, to collections of collateralized coins.

Some stablecoins also use algorithms to manage the supply and demand of the coin so that what is in circulation matches what is held in reserve.

But why do people use stablecoins when the U.S. dollar can serve its purpose directly?

There are institutional features that encourage investors to use stablecoins.

The first is the increased costs when exchanging cryptocurrencies for dollars. On some exchanges, there are longer processing times for dollar withdrawals. Fees are also often charged when dollar withdrawals are frequent or large.

Another feature favoring stablecoins is their use on more crypto-currency exchanges.

Crypto-currency exchanges that have a trusted volume do not provide investors with an on-ramp to dollar trading. They only accept stablecoins as a medium of exchange.