Bitcoin has reigned in the market as one of the leading digital and crypto forms of payment. Its market dominance, value, and popularity cement the position. However, those who rely on bitcoin for various transactions complain about its volatility hence the need for a more stable form of marketing. The need for a more stable payment led to the rise of Stablecoins.
Today Stablecoins are nearly overtaking Bitcoins in the transaction and cash transfer industry. However, not many people know their potential and how to use them. It is still uncommon in everyday purchases, and unlike Bitcoins, it is not used in restaurants, retail stores, and other purchase outlets. As it gains popularity, there is a need to know more about it and how to use them.
What are Stablecoins
Stablecoins refer to digital currencies whose value is pegged on an asset, other cryptos, nfts,fiat, and algorithms. It is like Bitcoin; however, bitcoin is not backed by any support, currency, or crypto. It is relatively stable and suitable for real-time, peer-to-peer, and secured transactions. Today, there are more than 200 Stablecoins, which fall into different categories. You can choose different types of Stablecoins depending on familiarity, preference, and other factors.
The rising popularity of stable coins
The rise in the demand for Stablecoins is one of the main factors contributing to its popularity. Most institutions currently use Stablecoins, especially fiat-backed Stablecoins, for different transactions. The popularity is also due to their benefit in transactions and trades. They are a faster alternative to reliance on fiat deposits and withdrawal transactions, and they are relatively stable hence avoiding the challenges of using bitcoins for business. Bitcoin is more volatile and can sometimes affect commodity trade and pricing. The volatility can affect an institution’s expenses and trading amounts.
Currently, institutions and retail exchange users only allow the use of Stablecoins and not bitcoins due to the volatility issue. Limited regulatory standards have also contributed to the popularity of Stablecoins. However, the creation of FinCEN could soon change the regulatory status since Stablecoins are currently recognized as a global form of money transmission; as such, they can be vulnerable to use by money launderers and terrorism financing.
Types of Stablecoins
Other cryptocurrencies back these Stablecoins. The collateralization shields them against fluctuation caused by the underlying collateral. You can over collateralize them to maintain their ratio of 1:1 hence boosting their security and stability.
Commodity collateralized Stablecoins
They are also referred to as asset-backed Stablecoins. These Stablecoins are collateralized using physical commodities and assets such as oil, gems, precious metals, real estate, etc. One of the everyday commodities used to back these Stablecoins is Gold. Some of the most common gold-backed Stablecoins include Tether Gold (XAUT) and Paxos Gold (PAXG). Their values are determined by the commodities used as collateral. Petro is linked to the price of oil.
The best way to use these coins is to rely on them to invest in underlying assets. The reliance on underlying assets will enable you to own the asset without having physical custody. They represent the legal and title ownership of the purchased asset. They are not very suitable as a medium of exchange.
Non-collateralized stable coins
These are Stablecoins not backed by any cryptos or physical commodities. An algorithm and not the collateral determines their value. The leading types of Stablecoins in this category include the CarbonUSD and USD. The algorithms determine the price and supply volumes to maintain the token’s price. The algorithm also relies on intelligent contractors to sell the tokens if the price falls below market levels. The brilliant contractors will also supply the tokens if the market price rises. The reliance on automation and intelligent contractors ensures the coins remain stable and secured to the peg.
These Stablecoins are backed by sovereign and foreign currencies such as sterling pounds and the US dollar. The market value of these currencies will determine the value of the Stablecoins. Using fiat as collateral means that if one needs to issue a certain number of cryptocurrencies, they must provide collateral in the fiat reserves worth the same value as the tokens. The collaterals enable the market to promote the stability of the Stablecoins and support it using actual bank account balances. Before issuing these cryptos, you must determine the appropriate cash or financial assets to pay for the tokens. You should always select those Stablecoins backed by powerful currencies to avoid volatility in the currency market and value.
These Stablecoins combine the features of other stable coins and offer mixed backing strategies. Algorithms and fiat can back them, or cryptos and physical assets can support them. They are rare due to the complex structuring and backing. An example is the IDEX which is a stable coin issued by Auroradao. ETH reserves and loans back hybrid Stablecoins, and the Decentralized capital manages the price.
Stablecoins are rising fast hence the need to understand the most suitable ones since the market is currently flooded with many Stablecoins. Some are relatively stable, while others have a lower value. It would be best if you also considered the collateral to maintain its relative value because a change in the collateral value could change the Stablecoins value. More stable collateral will support your Stablecoins and make them durable despite the market factors.