What is a Stablecoin? Learn about Cryptocurrencies with Lower Risk
What is a Stablecoin – Surely you know Bitcoin and also the most famous cryptocurrencies, but there are other digital currencies with less volatility that can help you invest safely.
Bitcoin, Ethereum, Solana, Cardano, Shiba Inu, Dogecoin, etc. Those are the cryptocurrencies everyone is talking about. Their enormous profits have made them very famous, and many want to invest.
The cryptocurrency market has quite a few risks, and many may want to enter but do not dare because of its dangers. Luckily, stablecoins exist.
These tokens are more secure, and their value is much more stable. This is because they associated with specific and almost always absolute values. The US dollar, the euro or even gold serve as the basis for this type of cryptocurrency and can divide into two types:
Stablecoins backed by stable securities
These cryptocurrencies are directly related to fiat currencies (or legal tender) or another element of value, such as gold.
Some are related to the value of specific cryptocurrencies. These examples are somewhat more remarkable since they use their mechanisms to regulate their value, but let’s see them carefully:
Related to fiat currencies
The best-known examples are TrueCoin and Tether. They are based on the US dollar, and in the case of Tether, it is a big win with a stake equal to 2.6 billion dollars.
The only thing that wants to be done is to deposit the fiat currency in question as a deposit, and then we are given cryptocurrency tokens. Transactions and exchanges can be made with any other digital currency, but its value is maintained at fixed rates.
It is also easy to get back the money we have deposited. If we return the tokens, they will give us their value in the fiat currency that supports the cryptocurrency because their value will not change much.
Related to material values
The worth of these coins is linked to that of a specific good, such as gold. The Gold Token has recently been announced, allowing you to obtain digital currencies based on the value of gold and even be exchanged them for gold.
These types of stablecoins are maintained because the market price of the goods with which they are related is safe and reliable. They use blockchain technology and are the perfect entry for those who do not want to take many risks.
Related to another cryptocurrency
These are somewhat riskier. Initially, they use the value of a cryptocurrency, but they are usually exchanged for the token with which they are related. For example, DAI is based on Ethereum, so we have to give Ethereum tokens to get DAI coins.
It remains steady thanks to more ether deposited than DAI tokens received. This transaction reduces risk, and investors can protect themselves if Ethereum goes down in value. They are somewhat rarer stablecoins that have relative security.
Algorithm Regulated Stablecoins
These cryptocurrencies not tied to any market value but instead use algorithms and smart contracts.
Smart contracts a series of instructions embedded in the blockchain. These directives execute actions automatically and do so safely, with complete transparency.
An example of an algorithmically regulated stablecoin would be USDX. These tokens held at a value similar to the dollar. Although they not backed by it, as was the case in previous cases.
This type of cryptocurrency can pose particular problems with the countries’ regulations. They can even return the money invested if they see that they cannot stand up to the norms of a nation.