While all indicators turned red in the minutes of the FED meeting, stablecoins maintained their positions and served as safe havens for many traders and investors.
What is a stablecoin? This is the concern we attempt to explore in the following lines.
A stablecoin, better a stable currency, is a cryptocurrency designed to maintain a stable value unlike Bitcoin $BTC , Ethereum $ETH or other cryptos that are very volatile.
👉 In practice, a stablecoin is backed by a reference value, most often a fiat currency such as the US dollar ($US), the euro (€), or sometimes a commodity, most often gold, which serves as a traditional safe haven.
Example: USDT (Tether), USDC (USD Coin), BUSD (Binance USD), DAI, etc.
The main types of stablecoins are:
1. Backed by a fiat currency or collateralized fiat, where each token is guaranteed by an equivalent reserve, for example, 1 USDC equivalent to 1 USD in the bank.
Examples: USDT, USDC.
2. Backed by cryptos or collateralized cryptos whose value is guaranteed by other cryptos locked in a smart contract, most often over-collateralized to absorb volatility.
Example: DAI.
3. Algorithmic or non-collateralized ones,
Their stability relies on automatic supply and demand mechanisms (mint/burn).
Example: TerraUSD (UST, which collapsed in 2022).
The utility of stablecoins:
Firstly, as its name indicates, they are used to stabilize and better protect the backed value against the volatility of the crypto market.
Secondly, to streamline transactions during money transfers anywhere in the world without going through any bank.
Thirdly, stablecoins facilitate trading as a safe haven between two operations, selling a volatile asset in USDT, for example.
Fourthly, in DeFi, stablecoins are used for loans, savings, or payments.
In conclusion, a stablecoin is like a bridge between, on one hand, the crypto world and, on the other hand, the world of traditional currencies, thus allowing to maintain a fixed backed value.
We do not claim to have exhausted this topic of all its content on this page that #binance offers us through #creatorpad so your constructive criticism will be of considerable value.
