Several economies around the world use cryptocurrency to obtain products and services. People have been interested in Bitcoin for a long time. However, the volatility of decentralized cryptocurrencies like Bitcoin is much higher than the market average. Many investors therefore avoid using cryptocurrencies.
Therefore, it is necessary to introduce stablecoins into the Bitcoin market. In short, a stablecoin is a digital currency whose value is tied to a specific project. Stablecoins are essentially US dollars in digital form. Basically, a stable currency is a digital currency with variable value. Many stablecoins are linked to major currencies such as the Euro or the U.S. dollar, and the ratio is usually 1:1. These can be bought and sold on the stock exchange. Other stable coins can be used, such as gold or other cryptocurrencies.
Types of stablecoins
To understand stablecoins, you need to focus on four basic types. Let's take a closer look at each stablecoin.
1. Commodity mortgage stable currency
For these stablecoins, other alternative assets such as precious metals are used as collateral. Gold is the most frequently traded asset. Therefore, these assets may also include real estate, precious metals and oil. Holding a commodity-backed stablecoin is similar to owning a physical object with actual monetary value. Most cryptocurrencies do not have this feature.
2. Fiat currency collateralized stable currency
This type of stable currency is the most commonly used in the market. They are backed by fiat currencies, such as British pounds, U.S. dollars, or euros. The support ratio of stablecoins is 1:1. For example, this is why a stablecoin is worth one currency (euro, pound, or dollar).
3. Crypto-collateralized stablecoin
Other cryptocurrencies act as collateral for this stable currency. One of the advantages of this stable currency is that it relies less on central authority compared with other stable currencies. The over-centralized nature of stablecoins aims to reduce the risk of price fluctuations. The overall volatility is less because they can respond more to price changes.
4. Unsecured stablecoin
There is no support for these forms of stablecoins. In order to regulate the supply of stablecoins, they adopted an algorithmic approach. When demand increases, the supply of stablecoins will increase. If coins are traded at low prices, the circulating supply will decrease.
Pros and cons of stablecoins
Let's take a look at some of the benefits of stablecoins.
The transaction cost of stablecoins is very low.
As long as you use stablecoins, you don't have to worry about the security of your data.
Your stablecoin transactions will be completely anonymous.
Stable coins are stable because they are supported by tangible assets.
Therefore, they are a trustworthy choice due to their strict laws related to statutes.
Stable coins have many advantages, but there are also some disadvantages. Let's check it.
The use of stablecoins requires third-party assistance.
To ensure that assets are properly accounted for, they need external audits.
Although they are not as volatile as other cryptocurrencies, their return on investment is low.