Introduction of the concept
Since cryptocurrencies like Bitcoin and Ethereum have a significant impact on how many investors connect with and think about money, the investors would like to avoid them because their price fluctuation can dramatically change from time to time.
In contrast, stablecoins encounter less volatility. They are cryptocurrencies programmed to track the significance of other investments, such as government currency or gold. Typically, Stablecoins attempts to mitigate price volatility by tying the worth of cryptocurrencies to more secure assets like fiat currencies. This fiat currency is s government-issued currency, which we are used to investing in it daily, including dollars or euros. “Stablecoins have gained traction as they attempt to offer the best of both worlds, the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.” Says Dan Oiknine.
Interestingly, Stablecoins exist in a broad range of types. According to a few estimates, there are more than 200 active stablecoin initiatives, which collectively execute more volume than Venmo, PayPal’s mobile peer-to- peer payments network.
Since 2020, there have been two types of stablecoins: the first one is fiat- collateralized stablecoins and the second one is crypto- collateralized stablecoins. These may be purchased on exchanges such as Kraken.
Introducing assets as collateral
Collateralized stablecoins utilize a variety of assets as backing. These assets can be fiat, precious metal, cryptocurrencies and other investments.
“The concept of gold-backed cryptocurrency, i.e., digital “stable coins” backed by physical gold, emerged to address cryptocurrencies’ price swings.” Says Dan Oiknine
Cryptocurrencies have shown to be unstable in response to market occurrences, whereas stablecoins are less volatile.
The Fiat-collateralized stablecoins are considered cryptocurrencies backed one-to-one by a typical financial institution’s underlying government currency such as USD or EUR. In 2014, this form of stablecoin was presented, when company Tether Limited published USDT. USDT is a dollar-backed cryptocurrency meant to operate 24h/7 on the global cryptocurrency market. In the year 2020, Tether remains the most extensively used stablecoin worldwide. Furthermore, Fiat-collateralized stablecoins are often maintained by a centralized operator, who keeps track of their distribution and enables users to manufacture and redeem tokens held in their possession.
In this case, the stablecoins are collateralized by one or more cryptocurrencies. These assets rely on open software to allow borrowers to lock crypto assets (thus collateralizing them) and produce fresh stablecoins in the form of loans. The purpose of this cryptocurrency is to retain its value concerning the US dollar, and it is kept on the Ethereum blockchain network. This can be accomplished by letting consumers utilize their Ethereum assets to create DAI on the Maker platform even without an intermediary.
Generally, these stablecoins are backed up by metals like gold or oil. The most famous stablecoins belonging to this category are Tether Gold and Paxos Gold. Moreover, Commodity-collateralized stablecoins are more vulnerable to price fluctuations.
However, since commodities are expected to rise in value over time, investors can acquire and keep this asset for investment growth.
Advantages and disadvantages of obtaining stablecoins
Dan Oiknine thinks that according to the market experts: “stablecoins are one of the safest investments in crypto. The
Source: Plato Data Intelligence