ABC (All Basic Concepts) of Stablecoin—every question answered here

Crypto investments are undoubtedly among the risky investments given their volatility—due to its relatively small user base. Yet there could be no denying for the utilities cryptocurrencies bring inherently, be it fast transactions, decentralisation and privacy etc. To bridge the gap and let the user enjoy the best of both worlds, stablecoin emerges as a significant option. But what exactly are these stablecoins, what makes stablecoin, stable?, and many more unanswered questions are a read away.

First, we have to understand what a stablecoin is. The name gives it away, a coin that is stable. It’s a utility token built on outsourced blockchain. It offers a facility of cryptocurrency that isn’t volatile and doesn’t change value. With holding its price constant, stablecoins offer privacy, convenience, security, stability and trust of fiat money.

A stablecoin is pegged by the fiat currency of its origin country or whichever the creator chooses. For our understanding, let’s take the US dollar. So theoretically, a stablecoin is always valued at $1, which, even after being crypto, fits the role of money, and abides by all the attributes, like store of value, medium of exchange, unit of account, etc.

It is very convenient to trade using stablecoins as it facilitates hassle-free transactions and cuts off the extra time taken for conversion. It also prevents the chaos of multiple investments and saves bridge time from one investment to another. Another blingy attribute is it helps ethically evade charges applied by the governmental authorities on every transaction in money and every profit on investment, or it being tracked down by anyone.

The notion of stablecoin being stable ensures their backing through mainly two concepts:collateralization and algorithm-based.

The collateral method means fiat collateralization, where each coin is backed by something, often US dollars, but it can be any currency or even gold. Tether is among the major companies that provide USDT stablecoins based on fiat collateralization. A basic requirement for the minting company is to maintain an equivalent reserve and abide by the protocol to maintain the circulation and keep the value intact at $1.

The alternative method is smart contract deployment. Some stablecoins are algorithmically pegged. The benefit of this method is it’s easier to audit. Another benefit can be the elimination of the need for any physical asset. On the contrary, these kinds of coins could become highly volatile and -and even lose their peg given a mishap as codes and algorithms control them. These smart contracts control the supply to maintain price stability, which can be controversial sometimes.

So whether you use CEX or DEX, stablecoins are to rescue you from the tradition of lengthy process of investing. They are as good of an investment as they are a medium of exchange. Stablecoins are the choice for safe investors and a medium for adventurous ones.