Stablecoins are a new form of cryptocurrency that is pegged to a stable asset, such as fiat currency, gold, or real estate. Stablecoins are cryptocurrencies that are designed to be pegged to a stable asset or basket of assets. The most popular and well-known stablecoin is Tether.
There are two types of stablecoins: collateralized and non-collateralized. Collateralized stablecoins are backed by a reserve of the same asset type as the stablecoin. Non-collateralized stablecoins are backed by the issuer’s promise to provide an equivalent amount of currency in the future. in exchange for the asset held as collateral. Stablecoins are also known as “fiat cryptos”. In this context, it means a cryptocurrency that is pegged to the value of a fiat currency such as the US dollar, or a commodity such as gold.
Why use Stablecoins?
In the cryptocurrency world, volatility is a constant. It is not uncommon for coins to lose or gain 50% of their value in just a few days. This volatility can be very detrimental to the crypto economy as it creates uncertainty and prevents people from investing in crypto assets.
This is where stablecoins come into play. They are cryptocurrencies that are pegged to fiat currencies like the US dollar, Euro, or Yen and thus have low volatility. There are two main types of stablecoins: collateralized and non-collateralized. Collateralized stablecoins have collateral that backs up the currency while non-collateralized ones do not. The most popular type of stablecoin is the collateralized one as they provide more security than its counterpart.