The use of stablecoin in the world of cryptocurrencies is increasingly becoming a habit.
This is because, as you all know, cryptocurrencies are very volatile and to protect themselves from this very large price variation, we resort to stablecoins.
In fact, all crypto exchanges allow the use of the stablecoin inside them and allow you to move liquidity very easily.
But let’s see how a stablecoin works.
What is a stablecoin
A stablecoin is a cryptocurrency that relies on an existing blockchain like Ethereum and thanks to an algorithm it can perfectly replicate a fiat currency.
Being that it replicates a fiat currency, it doesn’t have as much volatility as bitcoin.
If we take the USDTether stablecoin, which was one of the first to be created and is the most used, it has a value equal to 1 USDT to 1 USD.
The issuing company should have the same USDT dollar consideration in its safe to allow for currency hedging.
So if you buy 100 USDT the company should have 100 USD real as a hedge.
This process allows the crypto to balance the dollar value otherwise it would also be volatile.
But very often this hedging is subject to other assets such as gold, because there would not be enough guarantee only with fiat currencies.
In fact the dollar is proving to have a major devaluation and collateral problems unlike many years ago which was thought to be strong.
A stablecoin may also be anchored to an asset such as gold or oil, but their development is still in its infancy.
The important thing about stablecoins is that they must have very stable guarantees to cover the risks of excessive devaluation or bankruptcy.
The varies stablecoin
Stablecoin collateralised with fiat currencies
Centralized Tether type stablecoins were the first to be introduced and are issued and controlled by private companies that have a guarantee demonstration.
They are anchored 1: 1 with fiat currencies such as dollar, euro, pound, etc …
They are currently the most used and those with the greatest cryptocurrency exchange rates.
Stablecoins collateralised with digital assets
Then there are the stablecoins that have as a collateralization in crypto assets such as Maker Dao.
These stablecoins allow to be created in exchange for a guarantee in the form of a cryptocurrency like Dai that Ethereum must be blocked.
They are decentralized because their system is managed by nodes like Makerdao.
The problem with this type is that they need a lot of guarantee in digital assets and consequently the ratios are 1: 1.5 or much more than the digital asset.
This is because connected to very volatile assets I can suddenly change in price not guaranteeing stability.
Crypto stablecoin not collateralized
Then we have a new typology that is still under development and are those defined as crypto stablecoin.
This typology is totally decentralized in that they have an algorithm that manages supply and demand automatically, balancing the issue and circulation of the currency.
In fact, if there is a lot of currency circulating, the algorithm withdraws more tokens and if there is a need for new tokens, it produces equal to the demand.
The problem with this type is that you have to have a lot of liquidity when it serves as a cover for the system.
Central Bank Digital Currency
Finally we can also insert in this context the CBDC (Central Bank Digital Currency) which are stablecoins issued by the central banks of a nation and are guaranteed by the state itself.
This typology can be inserted in the stablecoins collateralized with fiat currencies.
These digital currencies are not yet in circulation but soon they will be, starting for example from the Chinese currency (yuan) that is carrying out the project.
Because the use of stablecoin is important.
The stablecoin can be an excellent payment method when it uses the blockchain as a storage method.
This makes it very secure and cheaper in transactions, compared to a traditional system which is much slower and more expensive.
Furthermore, using it in exchanges becomes imported when, for example, a digital asset is rapidly depreciating it allows us to convert it and remain still waiting for a new rise.
In the last period, services are being developed that offer very high interests by using the use of stablecoin as an investment tool.
Some of these services are Blockfi, Crypto.com, Celsius Network, etc., which by depositing stablecoins but also cryptocurrencies, allow a return with interest.
How and where to buy stablecoin
As I said before, the use of stablecoin is guaranteed by all the Exchange, since its use is fundamental.
But a distinction must be made, centralized stablecoins are the easiest to buy just by going to any exchange and depositing fiat currency by converting it into stablecoin.
On the other hand, if you want to buy DAI for example, you must use the Makerdao service that blocks ethereum in exchange for the stablecoin.
The other stablecoins described above are not yet available but will soon be available and will certainly be listed on the Exchange.
To conclude, stablecoins are very important even if they do not reflect the idea of Bitcoin, but are used to have a better service than traditional fiat currencies.