Stablecoins are one type of cryptocurrency. The idea behind them is that they are more stable, which lets them overcome the volatility and associated risk with cryptocurrency. Learn what a stablecoin is and what we can do with them.
How Do Stablecoins Work?
Stablecoins are cryptocurrencies tied to the value of an outside asset. Some are backed by gold or the US dollar, others are backed by cryptocurrencies or something less stable. The goal is that by linking the price of the stable coin to that of a more stable asset, like gold, its value becomes more stable.
This way, you can enjoy the various benefits of cryptocurrencies, but without the high volatility, they are associated with.
When discussing how do stablecoins work, the basic idea is that the entity behind them will have a reserve with the asset it uses to back the stablecoin. This reserve acts as collateral and lets the entity adjust the price of the stablecoin as the price of the backing asset changes.
The main differences in stablecoins are the type of collateral that backs them.
This is the type of stablecoin that most people think of when discussing what is a stable coin. It is connected to a fiat currency, such as the US dollar. Connecting fiat-backed crypto to the USD is the most popular option, but you can also find stablecoins connected to other currencies. An example would be the bi-lira and the Turkish lira.
Some of the most popular examples of this include USDT (Tether), USD Coin, and Diem, which used to be Libra.
Precious Metal-backed Stablecoins
A variation of the fiat-backed stablecoins is a version connected to precious metals. Common examples include gold and silver.
These stablecoins use cryptocurrency as their collateral instead of relying on fiat or precious metals. That may seem odd initially, as stable cryptocurrency coins are designed to be less volatile, and this doesn’t seem like something you could achieve with crypto as collateral. However, it works via a method of locking up the crypto collateral of a user. Smart contracts control the process to allow for decentralization.
The most common examples of this include DAI and Bitshares USD.
When discussing what are stablecoins, algorithmic stable coins are the option that is not collateralized. Instead of using collateral to maintain a stable value, these coins rely on an algorithm. That algorithm adjusts the supply of the coins by creating or burning coins depending on whether the price needs to go up or down.
Currently, algorithmic stablecoins are the least popular option. Carbon is an example that is still in use. The former Basis is another example.
It is also important to note that any of the stablecoin methods that rely on collateral or an entity holding a reserve will be less decentralized than most cryptocurrencies. This leads to an element of counterparty risk.
What Can We Do With Stablecoins?
There are several ways that you can use stablecoins, with each appealing to a different type of person and use case.
Here are some of the real-world applications of stable crypto coins:
- Help Those in Areas of High Inflation
One of the most commonly cited use cases for stable coins is to help people in areas with high inflation. High inflation makes it hard to afford things, and it also makes it hard to move capital. Stablecoins offer an alternative by letting people in these areas convert their fiat to a stablecoin. That, in turn, helps them fight inflation.
- Provide a Safe-haven Asset
Stablecoins are designed to be safe-haven assets, as they should be stable. This makes investing in them a way to protect your assets, such as in the above use case in areas with high inflation.
- Expand Banking to the Unbanked
Stablecoins also offer a solution for the millions of people around the world who are currently unbanked.
- Assist With Remittance and Cross-border Transactions
Typically, sending fiat internationally comes with high fees. Stablecoins can offer an alternative method of sending money internationally without having to pay such high fees.
- Hedge During Trading
For those who trade cryptocurrencies, using a stable coin offers a hedging mechanism. As a refresher, hedging reduces your risk if a price moves in the wrong direction. It is common to use stablecoins to hedge against the volatility of other cryptos. Additionally, investors will frequently convert crypto to crypto stablecoins if they think the prices may drop soon, as this protects their value.
- Quick Settlement
Like other cryptocurrencies, stablecoins operate 24/7, allowing for quick fund settlement. This is helpful for giving money to friends, buying goods, paying employees, and more.
- Set up Escrow
Combining smart contracts with stablecoins allows for automated escrow accounts.
- Lend Stablecoins
Lending stablecoins tend to offer a high-interest rate, thanks to the various other use cases that lead to its high demand.
- Accept Payments
As stablecoins advance, some businesses are introducing them as a way to accept payments. This use case helps eliminate the transaction fees associated with payment processing.
- Pay Employees
Another business-related use case for stable coins is using them for payroll. This is particularly appealing for companies with international workers as it reduces the international fees.
- Power Decentralized Applications
Decentralized applications that include payments can also use stable coins. This eliminates the variations in payments due to price volatility.
What Can We Do With Stablecoins Using 7b Crypto Broker?
7b crypto broker serves as your crypto broker, letting you easily convert between various stablecoins. You can use this to take advantage of several of the above use cases.
If you are concerned about inflation or a crypto market crash, you can use 7b to convert your funds that are in potentially volatile cryptos into stablecoins to reduce your risk.
If you trade cryptocurrencies, you can use 7b to convert some of your cryptos to stablecoins as a form of hedging.
You can also simply use 7b to invest in a stablecoin of your choice as a way to take advantage of its store of value and status as a safe-haven asset.
Try 7b Cryptocurrency Broker App!
When you are ready to take advantage of stablecoins, just download the 7b broker app and buy the stablecoin of your choice. With more than 2,000 crypto pairs, there are plenty of stablecoins to choose from.