What is a stablecoin and its types?
Here if we talk about cryptocurrencies, it involves notoriously high volatility. Generally speaking, there are many cryptocurrencies around which there is a possibility of the price of those cryptocurrencies fluctuating around 50% in a day due to the frequent negative or positive events around them. However, there is also a specific type of crypto that plays an important role in maintaining stability. Yes, there are cryptocurrencies that, while maintaining ‘stability’, are associated with a substantial portion of the total industry market capitalization. Today we will discuss this topic in this blog, from which coins are there? How are they able to work? And why would one want to buy this kind of cryptocurrency that is stable? If you are interested in bitcoin trading, learn the computing cloud, fog, and edge services in blockchain network.
What are stablecoins?
Here if we talk about stable currency, it is a type of cryptocurrency which is linked to ‘stable’ assets like gold, euro, USD, etc. If we talk about pegging, essentially it is capable of mimicking the price of the underlying asset. In other words, it is seen as the digital equivalent of assets in the real world. For example, USDT, a currency that originated as a stablecoin pegged to a dollar, mimics the real price of a dollar in the real world. On the other hand, all of the stablecoins that are available generally function in a form that is easily accessible from centralized finance to decentralized ones. Stablecoins can be held by anyone and easily exposed to cryptocurrencies without worrying about volatility.
How are stable coins able to work?
Cryptocurrencies, like any emerging asset class, are known to be susceptible to market forces. However, several crypto projects are actively exploring ways to increase participation and reduce risk in the wider crypto ecosystem. In addition, there are several solutions available that go well beyond the buy, stop orders and sell orders of traditional markets. Price fixture is prepared Straight into the asset itself. If seen as a result here, it is a new subset of the cryptocurrency market called stablecoins. The stablecoin market witnessed an explosion during the year 2020-21, with its market cap growing nearly three times.
Types of Stablecoins
Here, if we talk about the different types of cryptocurrency, Stablecoins can also be divided into subcategories based on the asset from which they can be pegged or used to secure pegs. Let us know about each in detail:
- Fiat-collateralized stablecoins
Here if we talk about a fiat-backed stablecoin, it always plays an important role in maintaining its value at par with fiat currency. Fiat currency is started by the government of a country. Fiat-backed stablecoin capable of following YUAN, USD, EURO to INR. Typically, these types of stablecoins are centralized as the reserves are maintained by a central authority from time to time as well as audited by third parties. For example, Tether by which the rights to burn or issue USDT in the market are held.
- Commodity-backed stablecoins
Commodity-backed stablecoins, which maintain their pegs in fiat currency in addition to commodities such as gold. Typically, these stablecoins choose similar models to operate, having underlying commodity reserves of centralized authority. At the same time, it is considered obligatory to get audit of reserves if seen prescriptive. Furthermore, this stablecoin can be relatively risky when compared to its legal counterparts. Because there is more volatility if you compare the commodity to fiat currency. On the other hand, when viewed as a precious metal, it is much easier to maintain a stockpile for money than a heavy and physical commodity. Commodity-backed stablecoins with some notable examples being Tether Gold ($XAUT) and Pax Gold ($PAXG)