November 14, 2022
Stablecoins are the backbone of crypto and it’s what makes the merry-go-round. They are as necessary as your spine, they keep the markets up and running. Lets have a look on how they work:
Fiat-backed stablecoins are backed by a fiat currency, such as the US dollar or Euro. These stablecoins are designed to maintain a stable value by tying their value to the value of the underlying fiat currency. For example, a stablecoin that is backed by the US dollar will have the same value as the US dollar.
Asset-backed stablecoins are backed by a physical asset, such as gold or oil. These stablecoins are designed to maintain a stable value by tying their value to the price of the underlying asset. For example, if a stablecoin is backed by gold, its value will be based on the price of gold on the market. Usually these stablecoins are overcollateralized due to the assets price volatility.
Algorithmic stablecoins are designed to maintain a stable value through the use of smart contracts and algorithms. These stablecoins are not backed by a physical asset, but rather rely on complex algorithms to maintain their value. These algorithms can automatically adjust the supply of the stablecoin in order to maintain its value. Usually there is a volatile asset associated with the stablecoin which acts as a balance, if stablecoin decreases in value, the volatile asset is used to buy the stablecoin to increase its value.
Stablecoins can offer several benefits to users. They can provide a stable store of value, which can be useful in countries with unstable currencies or in situations where the value of a cryptocurrency is highly volatile. They can also make it easier to buy and sell cryptocurrency, as users do not need to worry about the value of the cryptocurrency fluctuating.
However, there are also risks associated with stablecoins. Asset-backed stablecoins are subject to the risks associated with the underlying asset, such as the risk of theft or damage. Algorithmic stablecoins are subject to the risks associated with the underlying algorithms, such as the risk of malfunction, hacking and depegging . Fiat-backed stablecoins are subject to the risks associated with the underlying fiat currency, such as the risk of inflation or devaluation.
Overall, stablecoins can be a useful tool for users looking to store or transfer value, but it is important to carefully consider the risks and benefits of each type of stablecoin before choosing one to use.