Stablecoin is a cryptocurrency whose value depends on a stable asset or commodity, such as the dollar.
For example, a currency like Tether (USDT), which is backed by the dollar, always maintains its value at a constant level.
The key difference between stablecoins and other currencies is price stability. For example, the price of Ethereum is constantly variable. In contrast, a currency like Tether consistently maintains its fixed price.
Stable coins are based on blockchain technology, which makes them transparent and secure. Also, in the case of stablecoins, it is possible to make quick transactions with low fees.
Stablecoins have become increasingly popular in recent years due to their ability to retain value as well as easy access to global markets. With increasing demand, more stablecoin projects have been launched to meet the needs of the crypto market.
These cryptocurrencies allow traders and investors to enjoy the convenience of working with crypto while eliminating the risks associated with price fluctuations. This stability makes stablecoins a popular option for those interested in investing in digital currencies, But they are wary of extreme price fluctuations.
Types of stablecoin
There are different types of stablecoins available in the market, each with its mechanism to maintain stability. Some of the most common types include:
Fiat-Backed Stablecoins
These stablecoins are backed by fiat reserves, such as US dollars or euros. In this model, the stablecoin issuer maintains a corresponding amount of base currency in reserve, which can be used to redeem the stablecoin at any time.
For this type of stablecoin, the issuer must maintain fiat currency in a dedicated account, with the amount corresponding to the number of outstanding digital coins according to a predetermined conversion ratio (typically 1:1).
Fiat-backed stablecoins are the simplest type of stablecoin, making them easy for users to understand and utilize.
Tether (USDT)
Tether (USDT) is a cryptocurrency pegged to the US dollar. It was the first stablecoin developed for trading in the crypto market and offers a fixed value. 1 Tether is always equivalent to 1 US dollar.
People interested in investing in the cryptocurrency market, but seeking a safer option to avoid the volatility of other cryptocurrencies, often choose Tether (USDT) due to its stability.
USD Coin (USDC)
USDC is an Ethereum-based stablecoin pegged to the US dollar at a 1:1 ratio. This means holders can redeem 1 USDC for 1 US dollar at any time. Each USDC is backed by a dollar or an equivalent asset held in accounts of US-regulated financial institutions.
This token is supported by Circle and enjoys significant popularity in the market.
TrueUSD (TUSD)
TrueUSD is another stablecoin with a value pegged to 1 US dollar. Developed by TrustToken, it’s known for being one of the most stable stablecoins available.
Commodity-Backed Stablecoins
These types of stablecoins are supported by commodities such as gold, silver, oil, etc., which are stored by the issuer of the stablecoin. DigixDAO (DGX) and Tether GOLD are examples of commodity-backed stablecoins.
1. Tether Gold (XAUT)
Tether Gold is a well-known commodity-backed stablecoin whose value is tied to gold. This token is supported by Tether Limited.
2. Digix Gold Token (DGX)
Digix Gold Token or Digix Gold Token is a stablecoin backed by gold. This token is supported by Digix Global. DigixGlobal is a blockchain technology company founded in 2014.
3. Paxos Gold (PAXG)
Paxos Gold is a gold-backed stablecoin. This token is supported by Paxos Trust Company.
Each PAXG coin is equivalent to one ounce of gold. To ensure transparency and increase trust, Paxos Trust Company registers each ounce of gold with a unique identifier in the blockchain, allowing users to confirm gold ownership.
Pros of Stablecoin
- Most are backed by real assets and fiat. They can be used for global transactions.
- The transaction cost of stablecoins is low. Asset transfer is quick and easy.
- Traders and investors use them to hedge against assets in volatile markets.
- Anyone, anywhere, anytime can buy fiat currencies or gold digitally using stablecoins.
- Almost any type of asset can be pegged to different types of stablecoins.
- Speculators cannot manipulate them easily.
- Stablecoins can help determine the validity of the network and other cryptocurrencies.
Cons of stablecoin
- It depends on the specific institutions and the state of the crypto market.
- If the crypto market is collapses entirely, capital invested in stablecoins could also be lost.
- Stablecoins are algorithmically manipulable.
- Their code should be checked first.
- Due to fiat backings, the rules of fiat currencies affect them.
Conclusion
Stablecoin is a type of Crypto currency with price stability that is used for transactions, payments and investments in the world of cryptocurrencies.
These types of currencies are issued on the basis of various assets such as the US dollar, gold or other cryptocurrencies and can be a solution to the problem of extreme price fluctuations in the cryptocurrency market.
An example of a popular stablecoin is Tether (USDT), which has a reserve of US$1 per USDT and is widely used in cryptocurrency exchanges for transactions and payments.
Iranians can buy Tether (USDT) from OK Exchange to buy digital currency and trade cryptocurrencies.