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What You Need To Know About Stablecoins
Cryptocurrencies come in different shapes and sizes, and investors usually hedge their investments to cover many coins and lower the risks involved. One option to consider is stablecoins, which are unique among blockchain-based cryptocurrencies as they are a bridge between traditional and cryptocurrency.
This article will delve deep into what stablecoins are, how they work, how they can be used, and which stablecoins make the best investment. Due to the way stablecoins are set up, investing in them is safer and less risky, which makes them a better long-term investment.
What are Stablecoins?
Stablecoins are a type of cryptocurrency designed to offer all the convenience of using cryptocurrencies but with the stability of traditional fiat money. The value of stablecoins doesn’t rely on market forces; instead, it’s fixed to the value of the US dollar (or other fiat currencies), usually at a rate of one for one.
That way, a single unit of a stablecoin is worth one dollar regardless of any outside forces. The value of the dollar itself can change and vary, and it affects the value of stablecoins. These changes are much less noticeable and less volatile than with other cryptocurrencies.
What are the Different Types of Stablecoin?
There are a few different types of stablecoins out there that the users should be aware of. This difference comes from the way the stablecoins are backed. It affects their worth and stability, but all stablecoins can be used similarly – to make purchases and store value.
Fiat-Based Stablecoins
This is the most common type of stablecoin. The value of these stablecoins is based on the value of traditional fiat currencies. Fiat money is the currency issued by the government, and the central bank sets its value.
In most cases, the value of a stablecoin is based on the US dollar. There may be other stablecoins in the future that will be based on the value of other fiat currencies as more countries are looking for a way to get into the crypto market. Stablecoins that are backed by fiat money need to have reserves that back up their value. Independent accounting firms routinely audit these reserves.
Crypto-backed Stablecoins
Another way to back up the value of a stablecoin crypto is to have a reserve made in another cryptocurrency. However, since the value of cryptocurrencies is volatile, the stablecoin will be much less stable than the fiat-based version. The value of such stablecoin is rarely in one-to-one proportion. For instance, the Dai (DAI) stablecoin issued by MakerDAO is collateralized at 150%, meaning every 1 DAI in circulation is backed by 1.5x its equivalent value in Ethereum (ETH) or other cryptocurrencies.
Some cryptos on the market have been in use for a long time and have been known to come back after downturns. These are still volatile, but in the long-term view of things, they can be stable enough to be used as a basis of a stablecoin. It’s, therefore, important for investors to closely follow the developments in the crypto world available on www.cryptomaniaks.com, as it might affect the value of such a stablecoin.
Algorithm-based Stablecoins
The third and final method to base the value of a stablecoin is through algorithms and smart contracts. These are automatically executed to manipulate the circulating supply depending on market conditions. When the value of such stablecoins starts to drop, the smart contracts decrease the circulating supply to increase its scarcity and value.
Algorithm-based stablecoins can’t be exchanged for other currencies at a certain rate, as is the case with the other types we mentioned.
How Can One Use a Stablecoin?
Stablecoins are made to be used just as any other cryptocurrency. They can be used to make purchases, pay for services, and replace fiat money. The blockchain on which cryptocurrencies are based also allows for various other services – such as automated smart contracts, already in use in many different industries.
Stablecoins are also used to store value, just like traditional money. In this regard, they are better than the cryptos not tied to conventional currency. Their value won’t change over time, at least not as fast as some cryptocurrencies might.
What are some of the Best Stablecoins for Investors?
There are dozens of stablecoins to choose from, and investors usually choose based on some of their special features rather than their value – since they can’t change. We will outline some of the best stablecoin cryptos out there:
Tether
Tether (USDT) is considered the world’s first stablecoin and has the highest market cap of all its peers, sitting at just under $72.5 billion. It’s regarded as the stablecoin, with very few financial risks. The major downside of using this stablecoin is that it’s been hacked and somewhat centralized as a response to the hacking.
USD Coins
USD Coin (USDC) is a stablecoin representing tokenized U.S. dollars on the Ethereum (ETH) blockchain. It’s managed through a consortium called Centre formed by Circle and Coinbase. The USD coin’s value is based on Circle assets, which makes it safe. The biggest downside is that it uses Ethereum’s network, and it’s known for its steep fees.
Binnance Dollar
Binnance Dollar (BUSD) is a stablecoin backed by the U.S. dollar issued on the Ethereum (ETH) blockchain. It was created through a partnership between Binnance, the world’s largest Bt cryptocurrency exchange, and Paxos, a leading crypto infrastructure provider. Due to regulation challenges, Binnance Dollar can no longer be traded on its own exchange platform, Binnance.
DAI
Dai (DAI) is a cryptocurrency on the Ethereum (ETH) blockchain regulated and maintained by MakerDAO, a decentralized autonomous organization, or DAO. It was one of the first stablecoins and decentralized finance instruments to get mainstream support and broad adoption. Dai uses smart contracts to keep its value stable, so it’s not backed by any fiat currency.
PayPal USD
PayPal USD (PYUSD) is a newly released stablecoin by payments processor PayPal, in collaboration with Paxos. It’s an interesting venture as one of the largest payment processing companies is venturing into the stablecoin market. The value of PayPal USD is tied to the US dollar in a one-to-one ratio.
Should You Invest in One?
When investing in cryptocurrencies, most investors focus on the big names and the ones that aren’t tied to the value of fiat money. That way, they can profit from the investment as the value increases over time. The main point and benefit of investing in stablecoin alongside other crypto coins is to mitigate the risk.
The risks are lowered by the stability that comes with the backing of the governmental institutions. However, this remains a deal breaker for some users, as cryptos are a way out of traditional finance. It’s a matter of balance, as is the case with all investments.
Conclusion
Stablecoins are a fascinating financial tool. They are digital currencies based on blockchain, just like cryptocurrencies, but a unique version of them. The value of a stablecoin is tied to a fiat currency or to the value of another crypto. There are also stablecoins whose value comes from a series of smart contracts.
The users, therefore, get the best of both worlds when using stablecoins. However, for some, tying a stablecoin’s value to one issued by the government defeats the whole purpose.
