Everything To Know About Stablecoin, Its Significance and Purpose

Stablecoin emerged as a more regulated counterpart of crypto. These distinct assets are pegged against a currency, commodity, or financial instrument. With that particular aspect, it brings more stability to the ecosystem. Stablecoins have been particularly instrumental in beating volatility especially when compared to the typical cryptos like Bitcoin. To understand it thoroughly, one needs to go through all of its aspects.

A Full-Blown Account of Stablecoin

For the reason mentioned above, stablecoins become a better option for volatile cryptos. Moreover, they can be pegged against the most commonly used financial instruments. The best examples would be the US dollar and gold. Due to this, they also come under the regulatory lens. At the same time, they come closer to the mainstream financial system than any other crypto. According to some experts, stablecoin could be the first widely-used means of exchange from the crypto family.

Purpose and Working of Stablecoin

Stablecoins are usually pegged against a fiat currency. But that simply changes to any other commodity easily. Through the item, the stablecoin draws its value and it uses an algorithm to do it. Besides maintaining the price, the algorithm also helps in controlling supply. The stablecoins also maintain reserve assets with the same mechanism. The key purpose of this asset is to solve the problem of volatility.

As the cryptos were quite volatile and unfit for common transactions, stablecoins addressed this issue and became quite popular among the crypto community. As the adoption of stablecoin grew, its market worth soared too.

At the time of writing, its total market capitalization was at $123.8 Billion. The International Organization of Securities Commissions (IOSCO) recommended stablecoin’s inclusion in financial market infrastructure in 2021.

The body also advocated its incorporation in clearing houses and payment systems. Furthermore, the insight seekers must know that stablecoins come in different varieties too.

Types of Stablecoins

The investors and crypto users get to choose from the following variants.

Fiat-Based Stablecoins

These assets maintain a reserve of a fiat currency like the US dollar as collateral. While the currency could be changed too, the default has been the greenback. Notably, independent custodians maintain these reserves. The most popular options in this category are Tether (USDT) and TriueUSD (TUSD) so far.

Crypto-Based Stablecoins

These assets are backed by other cryptocurrencies like Bitcoin or Ethereum. Usually, these stablecoins are overcollateralized due to their exposure to high exposure. It means that the reserved cryptos hold much greater value than the stablecoins issued. For example, if a crypto worth $2 Million is kept as collateral. The stablecoin secure against it will have a lesser value in the market.

Algorithm-Based Stablecoins

This particular stablecoin does not necessarily require collateral assets. They maintain the supply of assets as well as the value using algorithms. This ilk of stablecoin enjoys some benefits but it can be less attractive to investors too. While it doesn’t depend on any other commodity for valuation, it may not establish that inherently.

As the world is preparing for regulated crypto adoption, stablecoins are getting more prominent. With all the specific attributes, these assets make their presence felt in all the financial circles.