Staking basics

What Is Stablecoin?

Shivendra Singh

Apr 14, 2023 • 4 min read

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A stablecoin is a crypto asset designed to maintain a relatively stable value to another asset, such as a fiat currency (e.g., the US dollar), a commodity (e.g., gold), or another cryptocurrency (e.gBitcoin). The value of a stablecoin is far less volatile than the price of other crypto-assets, which can tend to be very volatile.

Also Read: What is Cryptocurrency

History of Stablecoins :

The first stablecoin, BitUSD, was created in 2014. It was a crypto-backed stablecoin, meaning that it was backed by another cryptocurrency, BitShares. However BitUSD couldn't be as successful, and it was eventually abandoned.

The next major development in the history of stablecoins was the creation of Tether (USDT) in 2015. Tether is a fiat-backed stablecoin, which means that it is backed by fiat currency, in this case, it is the US dollar. Tether is the most popular stablecoin in terms of market cap, and it has helped to make stablecoins more widely accepted.

Also Read: Ethereum Staking Rewards

In recent years, there has been a growing interest in algorithmic stablecoins. The most well-known algorithmic stablecoin is TerraUSD (UST). UST lost its peg to the US dollar in May 2022, which caused a major market crash.

Here are some of the key events in the history of stablecoins:

2014: BitUSD is created, the first stablecoin.

2015: Tether (USDT) is created, the most popular stablecoin in terms of market capitalization.

2018: USDC is created, a fiat-backed stablecoin that is transparent and audited.

2020: MakerDAO decentralized stablecoin, soft pegged to USD with an overcollateralized loan position. This is what gives it the name of CDP (Collateralized Debt Position) which is not backed by any physical asset

2022: TerraUSD (UST) loses its peg to the US dollar, causing a major market crash.

The history of stablecoins is still being written, but it is clear that they have the potential to play a major role in the future of finance.

Also Read: Defi Tokens

Types of Stablecoins:

Mainly there are 3 kinds of Stablecoins:

Fiat-backed stablecoins: These are Stablecoins backed by one or more fiat currencies. The issuer of the stablecoin holds reserves of fiat currency in a bank account, and each stablecoin in circulation is backed by one unit of fiat currency. For example, Tether (USDT) is a fiat-backed stablecoin that is backed by the US dollar.

Also Read: Matic staking Wallet

Commodity-backed stablecoins: These are Stablecoins backed by a physical commodity, such as gold or silver. The issuer of the stablecoin holds reserves of the commodity, and each stablecoin in circulation is backed by a unit of the commodity. For example, Paxos Gold (PAXG) is a commodity-backed stablecoin that is pegged to gold.

Also Read: What is a Validator

Algorithmic stablecoins: These assets are not backed by any physical asset. Instead, they use algorithms to control their supply and demand in order to maintain a stable price. TerraUSD (UST) was an example of an algorithmic stablecoin that is pegged to the US dollar.

Also Read: Smart Contracts

Use Cases of Stablecoins

Stablecoins are used for a variety of purposes, including:

Making payments: Stablecoins can be used to make payments quickly and cheaply, without worrying much about the volatility of other cryptocurrencies.

Safeguard against market volatility: Investors can use stablecoins to hedge against the volatility of other cryptocurrencies.

Speculating on the price of other cryptocurrencies: People generally use stablecoins like USDT to speculate on the price of other cryptocurrencies in order to make decisions on the cryptocurrency’s performance.

Also Read: Matic Staking Rewards

Benefits associated with Stablecoins

Here are some of the benefits of using stablecoins:

Reduced volatility: Stablecoins are designed to have a stable price, which makes them less risky than other cryptocurrencies.

Readily available Liquidity: Generally Stablecoins are easy to use and can be traded on most cryptocurrency exchanges as a result of high liquidity and trust built around them.

Widely accepted: Stablecoins are accepted by a growing number of businesses and platforms for transactions.

Potential for stable growth: The stablecoin market is still in its early stages, which means there is potential for growth.

Stablecoins are less volatile and easier to use as compared to other cryptocurrencies, therefore if you want to keep your assets in a less volatile and easier to use, stablecoin may be a good option for you. However, it is important to do your own research before investing in any cryptocurrency, including stablecoins.

Also Read: Altcoins

Risks associated with Stablecoins

Stablecoins are a relatively stable form of cryptocurrency, but they still do have some risks related to them. For example, there is always the risk that the issuer of a stablecoin could run out of reserves and be unable to redeem the stablecoins for the underlying asset. In Particular, algorithmic stablecoins are more complex and may be more susceptible to hacks or other technical problems that could lead to its depeg.

Despite these risks, stablecoins have the potential to be a valuable tool for a variety of purposes. As the cryptocurrency market continues to grow, stablecoins are likely to play an increasingly important role.

Also Read: Total Value Locked

Conclusion:

Even though the future of stablecoins is still uncertain, there is a lot of potential for stablecoins to play a major role in the future of finance. Stablecoins can be used in a variety of ways, for example: to make payments, hedge against market volatility, and staking in DeFi applications and many others. As the cryptocurrency market continues to grow, stablecoins are most likely to become more widely accepted and used.

Frequently Asked Questions

Q) What Is the Purpose of Stablecoin?

Ans) Stablecoins are designed to have a stable value, typically pegged to a fiat currency, commodity, or algorithm such as the US dollar, Gold and TerraUSD.

Q) Do stablecoins have any drawbacks?

Ans) There are not a lot many risks as compared to a traditional cryptocurrency but there is always the risk that the issuer of a stablecoin could run out of reserves and be unable to redeem the stablecoins for the underlying asset, especially in the algorithm pegged stablecoins.

Q) What can you do with stablecoins?

Ans) You can store value, make payments, invest in DeFi, and speculate on the price of other cryptocurrencies with stablecoins.

Q) Which Is the Best Stablecoin?

Ans) There is no one "best" stablecoin, but some of the popular ones include Tether (USDT), USD Coin (USDC).

Q) Is Bitcoin a stablecoin?

Ans) No, Bitcoin is not a stablecoin. It is a cryptocurrency that is not pegged to any other asset or algorithm and its price can be highly volatile.