Many crypto projects try to track down ways to reduce the risks associated with market fluctuations. These days, the efforts to stabilize the cryptocurrency value go far beyond releasing and stopping trading it. With some cryptocurrencies, price stability is built into their asset. Today, we are going to look into these tokens. You will also explore how to make the USDT to TRX exchange or swap other stablecoins.
Different Kinds of Stablecoins
By stablecoins, we mean cryptocurrencies pegged to another external reference — like another currency, gold, or financial asset. Thus, we can distinguish between a few types of stablecoins, depending on the nature of the collateral backing them.
Fiat-Collateralized Stablecoins
Fiat-collateralized stablecoins are one of the most widespread ones. They are backed by a fiat currency, like the US dollar. The fiat collateral is stored by a central issuer or a financial institution. To issue a certain number of stablecoins, the central issuer must offer the dollar (or any other currency) amount proportionate to the number of tokens released. So, one token is equal to $1.
Crypto-Collateralized Stablecoins
When the stablecoin is backed by another cryptocurrency, it is called crypto-collateralized. They reside on blockchain and are powered by smart contracts rather than a central issuer.
How it happens that the stablecoins remain stable in value with a volatile reserve cryptocurrency? It becomes possible due to over-collateralization. It means that the value of collateral crypto exceeds the value of the stablecoin. For instance, a stablecoin pegged at $100 is backed by a $300-worth crypto. The $200 value difference serves as a buffer against price drops and the market volatility of the reserve cryptocurrency.
Algorithmic Stablecoins
Algorithmic stablecoins are non-collateralized, so they do not use another crypto or fiat currency as collateral. Instead, the algorithms keep the stablecoin’s value stable. A smart contract controls the supply of these assets and, eventually, their value. When demand increases, the algorithm will release new tokens. As the demand drops, the stablecoins will be taken away from the supply pool.
What Is the Purpose of Stablecoin?
Traditional cryptocurrencies (Ethereum and Bitcoin) are not backed by collateral. So, they are prone to severe price volatility. Their value can skyrocket or drop dramatically. Let’s take Bitcoin. Do you remember its value growing from $5,000 to $63,000 over a year? What a disappointment it was to discover that its price plunged to less than $20,000. While these price swings play into the hands of traders, routine transactions are put at severe risk.
Stablecoins do exactly what their name implies — keep the cryptocurrency value stable.
How Does Stablecoin Work?
Stablecoins are cryptocurrencies that hold their value stable by being pegged by vast reserves of real-world assets, other cryptos, or algorithms. For example, the reserve of a fiat-backed stablecoin may be pegged by $1 million dollars to work as collateral for a million stablecoins. So, the stablecoin and reserve should stay 1:1 proportional and move in unison. It means that once you decide to withdraw your tokens, you get an equal amount of the fiat currency extracted from the reserve.
Stablecoins have inherited a wide range of advantages from traditional crypto. They are accessible to everyone and can be traded at the Godex crypto exchange, which is available 24/7. When used for transactions, these assets prove to be fast — the payment is processed in seconds. Also, you do not have to pay hefty fees as one transaction may cost you less than $1. Stablecoins use smart contracts as well, leaving you an option to program transactions and execute them automatically.
Are Stablecoins Worth Investing?
Stablecoins are a safe harbor in the wild crypto world. But, because of their value stability, they may be less suitable for long-term investments. Especially, when you expect to create an impressive crypto portfolio. Stablecoins are a preferred choice for being a medium of exchange or carrying the transactions rather than being a way of earning.
