The cryptocurrency world is not for everyone as it involves a lot of risk and speculation. It is a highly volatile market with constant price fluctuations depending on various elements. As you know, the cryptocurrency is decentralized without any backup of assets so when the price fluctuates, your investment might be at great risk. To overcome this problem, stablecoins were introduced which are based on similar blockchain technology with the slightest of change. It is a bit different from the traditional cryptocurrency and is introduced with the support of an equal amount of gold or US currency. It makes the price stable due to the support of real-world assets. Know more about bitalpha ai platform evolution at https://bitcoins-evolution.com/.
When compared to the well-known cryptocurrency, Bitcoin, you can have far more stability with the stablecoins due to the stable assets support. The value is derived in a similar manner using software-driven cryptography. Even the other elements like blockchain technology remain the same with only change in the supportive financial asset. So, it seems that the conservative investors who do not want to enter any volatile market might go for stablecoins without any fear.
More stability arises due to the algorithm support. The stablecoins can maintain their value as a set of rules is strictly followed to control the supply of tokens. It is quite similar to a central bank’s rule which keeps a track of the demand and supply and accordingly controls the value of each stablecoin. Though the central bank has an unlimited supply option, with stablecoin, the number is limited and a miner cannot exceed the cap limit for supply.
Here, the main benefit is that more people have started trusting cryptocurrency and have got the confidence to use it as a medium of payment. The routine financial transactions with fiat currency can be replaced with the payment made with stablecoins. The trading within blockchain networks is using stablecoins to make payments when goods are bought or sold. After studying the benefits of stablecoins, one can say that financial transactions should not be dependent on any volatile market. Rather, if such stable valued coins are introduced, it becomes a lot easy to trade goods and services.
Stablecoins are divided into 4 major types. Let’s find out in detail about each of the stablecoins:
Fiat-collateralized – When a stablecoin is linked to the country’s fiat currency, it is in a way sovereign. It is named fiat-collateralized as it is assumed that the company has formed a reserve with an equal amount. Examples of such fiat-collateralized stablecoins are Tether, TUSD, etc. The company would have the same amount as a reserve and so the value will not fluctuate much.
Based on commodity – When the stablecoin is issued with the support of some assets just like fiat currency, it is a commodity-backed stablecoin. The company has gold, silver, or other assets to form reserves and can even support stablecoin with real estate. New tokens can be introduced backed by precious metals making the value quite stable.
Based on cryptocurrency – Yes, a stablecoin can be backed by another cryptocurrency and are rightly known as crypto-collateralized. There should be excessive compensation as compared to the actual value and that is possible with the support of other cryptocurrencies. It is an easy calculation that makes buying stablecoins quick by depositing the required dollars in ETH.
Based on the algorithm – Here, there is no backup, unlike the other stablecoin types. Special algorithm software is used to derive the price of each stablecoin to manage the demand and supply chain. Just like price, other variables like token numbers are also generated by the algorithm. It is a way in which the companies manage their reserves without affecting the price of each stablecoin.
In this way, stablecoins promise stability without compromising on the main goal of cryptocurrency – decentralization. It surely is a great deal how the companies maintain the value of each stablecoin and do not create more than the limit set by the crypto world. The guarantee given by the stablecoin is maintained and is growing its popularity among many investors due to the ease of transacting. You can invest in stablecoins after understanding the concept in detail as mentioned here.