Crypto Glossary

Posted on September 13, 2021 in
Glossary

Stablecoin

Stablecoins are cryptocurrencies whose price is tied to a different class of assets, like fiat currencies or gold, to keep the price stable. A benefit of cryptocurrencies such as Bitcoin and Ether is that they are not dependent on a third party to transfer payments, which opens the technology to anyone around the globe. A downside, however, is that cryptocurrency prices are highly volatile and unpredictable.

What are stablecoins?

Fiat-backed cryptocurrencies, which we refer to as stablecoins, use traditional currencies such as USD, GBP, JPY, and RUB to maintain their value. 

In other words, unlike cryptocurrencies like Bitcoin, which have volatile prices that move in accordance with the markets, stablecoins’ prices stay constant, pegged to whichever fiat currency backs them. In some use cases, such as stores of value, stablecoins are favored over volatile cryptocurrencies. Stablecoins are provided by different stablecoin projects that use various strategies to keep their prices stable. Some are centrally controlled, while others are decentralized.

A benefit of cryptocurrencies such as Bitcoin and Ether is that they are not dependent on a third party to transfer payments, which opens the technology to anyone around the globe. A downside, however, is that cryptocurrency prices are highly volatile and unpredictable. 

In order for everyday people to use them, this makes them difficult. On the whole, people believe that a week from now, both for their security and their livelihood, they will be able to estimate how much their money will be worth. Bitcoin’s unpredictability contrasts fiat money, such as the U.S. dollar, or other assets, such as gold, which are generally fairly stable. Currency values such as the US dollar typically change gradually over time, but sudden price fluctuations are typical for cryptocurrencies.

Why are stable coins interesting?

Many cryptocurrency exchanges did not have access to traditional banking, so early stablecoins were used to buy other cryptocurrencies, like Bitcoin. It is actually more beneficial to use alternative currencies instead of the official currency of a particular country, because alternative currencies are available anywhere in the world 24 hours a day, seven days a week, without any reliance on banks. It only takes a few seconds to complete a money transfer. 

A further advantageous characteristic of stablecoins is that they can execute smart contracts (blockchain-based agreements) without needing a legal license. The software dictates the terms of the agreement and when and how much money will be transferred, which happens automatically. This makes stablecoins versatile enough to be programmable like dollars cannot. When smart contracts first came around, stablecoins (coins that maintain a consistent value, even if the market changes) were used for seamless trading, but now stablecoins are also being used for lending, payments, insurance, prediction markets, and decentralized autonomous organizations (businesses that are operated without human involvement). 

Earn money with your stablecoins

Stablecoins can earn interest. A daily interest payment on your cryptocurrency holdings can be accrued simply by opening an account with a cryptocurrency exchange and reinvesting profits. There are few fees and no minimum balances for a majority of these transactions. 

An example of this is investing in a cryptocurrency that is backed by a precious metal, such as gold. In the event that the value of gold increases, the value of the commodity-backed stablecoin will rise due to its connected exchange value. However, a fiat-backed stablecoin does not act in this manner. Because fiat currencies such as the U.S. dollar or euro are meant to have a stable value and not fluctuate in price, these currencies usually have a fixed value. There is no sign that the value of a stablecoin that is pegged to a fiat currency will change over time. 

There are several other methods by which to earn money using stablecoins. Lending them out to borrowers is one of them. Annual percentage return can be up to 12% per year. 

Another method of making money is through the practice of staking. The terms staking and coin holding are related in that participating in maintaining the flow of the blockchain network on a specific asset is involved in staking. Because of this, you receive an income by participating in the network. Ethereum 2.0, Tezos, Algorand, and others can be found on various exchanges that provide staking rewards.

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