How do stable coins work?

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We are sure most of you heard crypto investors had become millionaires overnight, only to lose it just weeks later. The Crypto market is the most volatile market globally, and the most popular coins gain and lose their value in just a few seconds.

A stable coin is a cryptocurrency asset that has a fixed value with minor fluctuations here and there. Major stable coins peg their values to major world currencies like dollars, euros, pounds, and other fiat currencies.

At any given time, the stable coins with the biggest market capitalization are worth $1, which makes them more stable than the overall cryptocurrency market, which is volatile.

Let's start with the basics

There are two types of Stable coins: centralized and decentralized.

Stable coins based on a centralized platform are linked to a third-party custodian such as a bank. These cryptocurrencies are like IOUs tokenized and placed on a blockchain, such as Ethereum.

Decentralized stable coins are entirely transparent and non-custodial. No one has the authority over decentralized stable coins.

A central authority controls the minting and burning of stable coins.
Stable coins are kept in equilibrium using minting and redemption procedures.

Types of stable coins

1. Fiat-collateralized stable coins

These kinds of stable coins are linked to sovereign legal tenders. But these coins are not created by the central authority. Some of the most well-known fiat-collateralized stable coins are Tether and TUSD.

2. Commodity-backed stable coins

Reserved assets back these stable coins. For example, real estate, gold and other precious metals come under commodities. Whereas the company’s gold reserves back Kitco gold.

3. Crypto-backed stable coins

The cryptocurrencies back these coins, and they are crypto collateralized. Due to their volatile nature, these coins are overcompensated to be collateralized.

4. Algorithmic stable coins

These are non-backed stable coins in which prices, token numbers, and other variables are controlled with the help of special algorithms, software, and code to manage supply and demand.

Benefits of Stable coins

1. Reduce volatility

It might be challenging to anticipate the price of cryptocurrencies like Bitcoin or Ethereum when they fluctuate widely. There is no promise that the value of the coin will change. On the other hand, Stable coins are linked to more predictable measures like gold and gems and provide buyers and sellers security that their assets’ value won’t suddenly plummet.

2. To trade or store assets

There is no need to have a bank account to store stable coins. They are also simple to move around the world. Stable coins’ value may be easily transferred across borders, including where the U.S. dollar might be challenging to come by or where the local currency is volatile.

3. Transfer money cheaply

It’s quite easy to move stable coins. As a result, millions of dollars worth of Roma and other cryptocurrencies have been moved with minimal transfer costs.

4. Send to any country

Stable coins have a quick transaction time and minimal transaction costs compared to sending conventional money. As a result, they’re an excellent alternative for transferring funds worldwide.

Pros and cons of stable coins

Everything we know has pros and cons, and so do stable coins.

1. Stable value

Unlike bitcoin, Ethereum, and dogecoin, stable coins have a fixed value, making them more suitable for everyday purchases.

2. Easily tradeable

You can quickly and easily convert between stable coins and cryptocurrencies.

3. Useful for sending funds

You can send stable coins to anyone with a compatible cryptocurrency wallet without any added bank charges or fees.

Some stable coins may not be trustworthy

Tether, the stable coin with the most significant market capitalization, has received fines and trading prohibitions because of fraudulent activities.

Hope this helped!

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