What are stablecoins?
The cryptocurrency market is changing and developing all the time. Apart from other cryptocurrencies appearing, there is a new type of coins – stablecoins, which you might have already heard of. Many people are interested in what stablecoins are and how stablecoins work. So, today I will try to explain the point of stablecoins in simple words. I am sure you know that the cryptocurrency market is characterized by huge volatility. It means that it is rarely stable, and the value of cryptocurrencies may change drastically even throughout the day. It makes the market risky and easy to manipulate. Because of those problems, people started to think of a currency that would also be decentralized, but which would, at the same time, have a stable value. And this is how stablecoins appeared.
How do stablecoins work?
So now that we understand the point of stablecoins and how they differ from other cryptocurrencies, let’s talk about how they work and what stablecoins are used for. As you might have guessed, stablecoins can be used for daily operations, such as regular currency, due to their stable value. But how do stablecoins stay stable? The thing is that stablecoins are usually pegged to other currencies, typically fiat currency or gold. It means that their value depends on the currency value it is pegged to. If it’s still unclear how stablecoins work and make money, let’s go to the examples.
There are four main types of stablecoins. The primary type is pegged to fiat currency, such as USD, Euro, and others. Such coins are backed to fiat currency with the ratio of 1 to 1, which means that one coin stands for one unit of a fiat currency held to back up the stablecoin. It is, however, worth mentioning that such stablecoins are more centralized than others. Another type of stablecoin is the one pegged to cryptocurrency. This might sound weird, as cryptocurrencies do not associate with stability. However, the mechanisms of such stablecoins are close to the previous one. However, their ratio is different from 1 to 1. Moreover, such stablecoins have a security pledge to compensate for the price change. Such stablecoins have a more complex mechanism but are more decentralized, which makes them safer.
There are also commodity-pegged stablecoins, often collateralized precious metals such as gold. And last but least, there are non-collateralized stablecoins. They are usually based on algorithms and smart contracts allowing to sell tokens if the price changes from the pegged one.
How to buy stablecoins?
So now you might be thinking of which type to choose and how to trade stablecoins. Although each type has its pros and cons, the stablecoins pegged to fiat currencies are unquestionable leaders. So if you are struggling with choosing the kind of stablecoins, choosing fiat-currency pegged stablecoins, with its leader, Tether (USDT), would be the safest option. USDT is a popular type of stablecoin pegged to the US dollar, which can be easily purchased at a special crypto exchange. An example of such an exchange is B2Cash in Prague, which allows its users to trade stablecoins quickly on fine conditions.
To sum up, let’s repeat why we invest in stablecoins such as Tether. Tether, backed up by the US dollar, allows you to perform quick transactions such as transferring values with no need to use volatile crypto. It can also be a great choice for investors looking for a way to park their investments when the market is especially volatile.