Stablecoin is arguably the most important development in the crypto world. Unlike many other crypto terms, they are very easy to understand. So sit back, relax, we promise this article will be easy to read.
So, What are Stablecoins?
As the name implies, Stablecoin means ‘stable coin’. So it can be concluded that Stablecoin is a digital currency asset that has a stable price. Stablecoin itself is a new class in the world of cryptocurrency that offers price stability and is backed by various reserve assets.
Cryptocurrencies such as Bitcoin or Ethereum offer a number of benefits, such as no intermediary institutions to send payments and allowing users to transact with anyone around the world. However, cryptocurrency prices fluctuate drastically from time to time. Prices can double or half in the matter of minutes In order to offer crypto assets as investment products to the general public, the market needs a stable cryptocurrency who’s monetary value is stable and can be easily gauged.
Well, this is where stablecoins come in. Stablecoins are pegged to fiat currencies like US dollar or Euro, and used as US Dollar or Euro in the crypto world. DeFi (Decentralized Finance) products are often denominated in stablecoins. Prices of Cryptocurrencies are quoted in Stablecoins, too. One of the other functions of Cryptocurrencies is cross-border payment. If the prices fluctuates too fast though, value cannot be locked in and transferred effectively. Thus, stablecoins provide a great medium for money transfer.
Issuers of stablecoins normally have an equal reserve of fiat currencies or assets in their bank accounts to maintain the 1-to-1 peg to fiat currency.
So, what is Fiat Currency?
Fiat money is a legal note issued by the government and has no intrinsic value in it. Fiat currency tends to be a symbol of the country. US dollars, Euro, RMB, Indonesia Rupiah, Singapore dollars are all fiat currencies.
The value of fiat currency used to be backed by large reserves of gold. In the modern world though, gold reserves are no longer required. Fiat currencies are now backed by the central government of each country and its economy. With this guarantee, user normally don’t have to worry about using it when transacting.
In today’s modern economy, fiat money is used as a medium of exchange or barter. You can see the face value of this currency as it is written on the paper. While the real value depends on the goods or services you can buy with the money.
Types of Stablecoins
The following are some types of stablecoins circulating in the digital asset market.
1. Stablecoins pegged to fiat currencies
One type of Stablecoin that is very popular is the Stablecoin which is backed by fiat currencies. This digital currency will be pegged at a price ratio of 1:1. The US Dollar is one of the most popular fiat currencies used to back Stablecoins.
This type of stablecoin has an arrangement whereby the issuer holds a certain amount of fiat currency in reserve and issues the same number of tokens as the amount of fiat currency. So the supporting fiat currency reflects the supply of stablecoins in circulation. For example, the issuer holds 1 million US Dollars, it will be equal to 1 million Stablecoins with a value equivalent to 1 US Dollar each. Well, later that coin can be traded freely between users.
2. Crypto-powered Stablecoins
Apart from being supported by fiat currencies, Stablecoins can also be backed by digital or crypto assets. Coins of this type are also usually pegged to US Dollars at a 1:1 ratio, but the underlying collateral is digital assets, not fiat currency. So users can lock in a number of digital assets such as Ethereum as collateral for loans that are priced according to US Dollars.
The main idea of this type of stablecoin is to include it in a cryptocurrency portfolio. Since everything is done digitally on the blockchain, the system relies on the use of smart contracts to handle governance, issue units, and build trust. Of course, with the support of Stablecoin by crypto, it will create a decentralized ecosystem that is managed by the users themselves. Each user must trust that all network participants will act in the overall best interest, which is also one of the main attractions of cryptocurrencies in general.
3. Stablecoins on Algorithm
Well, this type of Stablecoin is the newest and has not been widely used. In fact, this stablecoin has no guarantee. So this one coin will use a blockchain-based algorithm to ensure that the price of the coin will remain stable with the price of fiat currency.
Examples of Stablecoins
Some examples of stablecoins that are currently circulating in the market include:
1. Tether (USDT)
USDT stands for United States Dollar Tether. This stablecoin was launched in 2014 and is still popular today. USDT is one of the oldest stablecoins, it has a very high market value and is one of the most valuable currencies by market capitalization.
Many people use USDT to move money between exchanges fast.
2. USD Coin (USDC)
USDT and USDC are two different cryptocurrencies. USDT is issued by Tether, while USDC is issued by Coinbase and Circle. USDC is a token that is widely used for investment, lending, payment and trading purposes.
Just like USDT, the value of USDC follows the US Dollar currency. So the value of 1 USDC is 1 US Dollar. This is what proves that the USDC value can be said to be very stable.
3. Rupiah Token (IDRT)
While USDT uses US Dollars as a price reference, IDRT refers to the Indonesian currency, namely Rupiah. Rupiah Token (IDRT) is a stablecoin based on the Ethereum blockchain. Since it is built on blockchain technology, of course it will allow you to send Rupiah around the world instantly.
IDRT is issued by PT Rupiah Token Indonesia, with a ratio of 1:1. So 1 IDRT is equivalent to 1 Rupiah. You can use this stablecoin to trade on various global crypto exchanges, interact with smart contracts on the blockchain, to send money to various countries.
IDRT has been whitelabelled by the Indonesian government as an acceptable cryptocurrency.
Well, that’s a little explanation about what stablecoins are, types of stablecoins, and examples of stablecoins. Are you interested in investing in Stablecoins? Coinomo has several stablecoin investment programs that you can choose from and of course make money.
