Cryptocurrency FAQ - What is a stablecoin?

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4 years ago

Because market prices for many cryptocurrencies have fluctuated wildly in the past, using them to make purchases of everyday items can be difficult, since most of those are priced in fiat dollars (money issued by a government's central bank such as $US, or Euro) and they do not change much. Refunds can be tricky too for vendors of goods and services if they are priced with cryptocurrencies.

By the time a transaction settles, coins (cryptocurrency) can be worth significantly more or less than they were at the time they were sent, - Binance Academy

Related reading: What's the difference between a coin and a token?

Because of this, different tokens were needed to solve these types of problems. Stablecoins are tokens designed such that the volatility of their price is minimized, relative to some stable asset or basket of assets. They can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals). Their use allows individuals to cheaply and rapidly transfer value around the globe while maintaining price stability.

Other use cases include providing liquidity, and hedging against volatility. It's notable that a stablecoin's market value can fluctuate, depending on supply, and on demand.

Examples of stablecoins include:

  • DAI: DAI is a token on the Ethereum blockchain that has a steady value of $1 US dollar, and is backed by other crypto assets

  • USDC: A token issued by regulated financial institutions, and backed by fully reserved assets, and redeemable on a 1:1 basis for US dollars

  • GUSD: Gemini Dollar is a stablecoin created by Gemini Exchange. It is pegged at a 1:1 ratio to the US dollar

  • Paxos: A token that is collateralized 1:1 with the US dollar (USD)

  • BUSD: A 1:1 US Dollar-backed stablecoin issued by Binance

  • Paxos Gold: A stablecoin backed by real gold reserves held by Paxos

  • Tether: Although Tether was originally pegged to $1 US dollar, it now supports four stablecoins: the U.S. dollar (USDT), the Chinese Yuan (CNHT) and the Euro (EURT), as well as a stablecoin backed by 1 oz. of gold (XAUT).

To learn about even more use cases for tokens, please stay tuned for my next article in this series.

Thanks for reading, and stay safe!

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Resources:

https://academy.binance.com/en/articles/what-are-stablecoins

https://www.kraken.com/learn/what-is-tether-usdt

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4 years ago

Comments

$ 0.00
4 years ago

thank you for visiting. i'm sorry, but i can't read the article that you sent to me. I will take a look at some of your content written in english.

$ 0.00
4 years ago

Very nice. 👍

It would be interesting to learn about the different ways that volatility is minimized in different stable coins. You kind of touched on that topic. Will you go more in-depth into that topic in a future article?

$ 0.00
4 years ago

thank you!

yes, if a stablecoin is pegged to a stable fiat currency (USD, Euro, etc.) and backed by corresponding reserves of the currency, that in itself makes it resistant to the volatility normally associated with most crypto. in theory, you could simply trade in your stablecoins for fiat money any time you wanted.

The fluctuating prices of stablecoins are simply a result of supply and demand. High demand can result in those tokens being purchased/exchanged for more then $1US. The opposite happens if there is a lot of selling action, resulting in the market being flooded with unwanted tokens.

DAI would be the only one that I listed in my post that has a more proactive strategy to maintain its value at $1US, since it is backed by crypto. I'm not sure i would want to delve more into that since Coinbase Earn did such a great job explaining it.

i won't rule it out though, but there are a few other topics that i need to write about before i consider it...Lol. Looking at you, "build your own brand part 2"... 😉

$ 0.00
4 years ago

Haha, that's right. That would be very helpful for me. But take your time. No rush from my side. 😊

$ 0.00
4 years ago

I've read about stablecoins (eybyoung) and it's really an interesting one to learn so you have an option to keep your assets safe from volatility. But I'm more on a risk-taker lol

$ 0.00
4 years ago

thanks for visiting and for the tip! Hmm...is eybyoung Tagalog for stablecoin?

as @MoreGainStrategies touched on, most individuals don't invest in stablecoins. but a common strategy is to use them to protect profits.

example:

  • 1 BCH is worth $250 today, and MoreGainStrategies buys 100 BCH for $25,000.

  • Next month 1 BCH doubles in value to $500, so MoreGainStrategies's BCH purchase is now worth $50,000. He feels that BCH will drop in value, so he trades all 100 BCH for 50,000 DAI.

  • The following month, 1 BCH drops in value to $200. MoreGainStrategies can now buy 250 BCH with his 50,000 DAI.

And MoreGainStrategies doesn't need to deal with a bank!

$ 0.00
4 years ago

Very well explained 👍

$ 0.00
4 years ago

You can also use stablecoins for trading other crypto. Usually, it's cheaper to go from crypto to stablecoin and back than from crypto to fiat and back. 😊

$ 0.00
4 years ago

Quality as always

$ 0.00
4 years ago

thanks for the kind words, and for your tip! =)

$ 0.00
4 years ago