Stablecoins Explained: All you need to know
A stablecoin is a popular form of cryptocurrency. Its primary purpose is to minimize a cryptocurrency’s volatility by pegging itself to a stable value. This stable value can be anything like gold, Indian Rupees, or U.S. Dollars. Some famous examples of stablecoins are:
- USDT (Tether)
- USDC (launched by CoinBase)
- BUSD (launched by Binance)
- SAI (DAI) (decentralized stable coin)
Stablecoins are like digital cash exchanged with any traditional currency like Rupees, Dollar, Euro, etc. It simplifies everyday transactions using cryptocurrency. Stablecoins offer the ability to complete transactions. Hence, with their growing popularity, any economy isn’t growing to survive without these.
Who can use a stablecoin?
Any stablecoin is usually available around the world. The one thing that differentiates stablecoin from standard currencies is that there aren’t any restrictions over the flow of stablecoin. In the case of standard currencies, there are always some restrictions. Therefore, through stablecoin, businesses can extend their global reach. Hence, stablecoins are primarily for the ones who want to form an open economy for themselves.
Are stablecoins regulated?
Some stablecoins are regulated while some are not. For example, it licenses Gemini Dollar and the Paxos Standard under the New York State Department of Financial Services (NYDFS). In the future, most of the stablecoins are likely to fall under the Payment Services Bill (PSB).
Types of stablecoins
There are three types of stablecoins. These are:
- Stablecoin Type 1: Fiat collateralized
This is the most basic stablecoin. In this, the token is pegged to a fiat currency. Then, the issuer simply deposits the fiat currency into his account and issues a token that can sell to the customer.
- Stablecoin Type 2: Crypto collateralized
In this type, the stablecoin is pegged to cryptocurrency, not to a fiat one. An example of this is Ethereum. There is a bit of risk involved for the investor in this stablecoin.
- Stablecoin Type 3: Nonfamous-collateralized
This stablecoin is not collateralized by assets (fiat or cryptocurrency). It still maintains its value, though, by expanding and contracting the supply of the price-stable currency according to the current demand. This is similar to what a central bank does with fiat currencies such as Dollar or Rupees.
Although stablecoins are often a safe escape point for many, their damage to cryptocurrencies needs to be considered. When large whales move down the market, stablecoins can secure themselves but can cause significant blows to the price of cryptocurrencies.