Stablecoin – What are they?

A term that has been gaining relevance in recent years of rises and falls in the prices of Crypto assets is that of “Stablecoin” or stable coins, and it is that these currencies are digital assets that have been created with a single purpose, that its value is always stable and does not have fluctuations or at least that these are insignificant. This is why it is very normal to find that stablecoins are anchored or make use of some physical assets such as fiat money, including the Dollar or the Euro, raw materials such as gold or other materials, and even some stable currencies make use of others. Cryptocurrencies to maintain its fixed value on a constant basis.

As we mentioned before, stable coins always seek to keep their price under control and without any exaggerated variation, but what makes these coins striking is that they have the best of two worlds, by anchoring a token to a Dollar, said Dollar will be represented in digital form through the token and can be controlled through Blockchain technology, which offers greater security and transactional monitoring that only a chain of blocks can offer.

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Since we have talked about anchoring a token to a fiat currency such as the Dollar, it is normal to find stablecoins whose price is 1 US Dollar and this is the most used asset to create coins of this type. But it is also true that sometimes we can find other currencies whose value is not exactly 1 Dollar, but can be another amount like 18 Dollars for example, and this does not mean that it is not a stable currency, but rather that it uses another asset other than the Dollar and therefore its stable value is 18 Dollars, this brings us to the next point that shows us the different types of stablecoins that exist.

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Types of stablecoins that exist

You will be surprised to know that there are not only stablecoins that are backed by money like the Dollar or the Euro, but there are a range of opportunities on how to support a Cryptocurrency to make it a stablecoin. Stable coins can be backed by different assets and we can find the following:

Fiat-backed stablecoins

It is by far the most used method in stablecoins, where it is common for the token or Crypto asset to be backed by one of the most accepted fiat currencies worldwide such as the Dollar, the Euro or the Japanese Yen.

As a general rule, each token is backed in an equal proportion of fiat currency, guaranteeing a parity of 1:1 where each user’s token will be guaranteed by a unit of Fiat money used as backup. This Fiat money that is used to create new tokens is stored in specially audited bank accounts to avoid excess creation of new tokens and always maintain 1:1 parity.

A clear example of this type of currency is Tether or USDC, which are two stable currencies within Ccoins, where one USDT or one USDC is equal to one US Dollar, making it ideal for online purchases or remittances.

One disadvantage of this modality is that it goes against one of the main ideals of Cryptocurrencies (decentralization). Since being anchored to a Fiat currency, this type of token depends on other external entities, in addition to being controlled and protected by the respective developer companies.

Commodity-backed stablecoins

Commodity-backed stablecoins are not that common but they do exist within the Cryptocurrency ecosystem and are especially accepted by a particular niche of users.

Among the raw materials that are used to support these Cryptocurrencies we find materials such as Gold, Silver, Diamond or Oil, where their support ratio can be as simple as 1:1, where a token of this type of stable currency It is equivalent to the price of the raw material according to its standard unit of measurement, for example in the case of gold and silver it would be the gram and for oil the barrels of oil.

An example of this type of currency is Digix Gold, which is a token whose value ratio is equivalent to 1 DGX token equivalent to 1 gram of Gold, as in the previous case, these reserves of physical assets are safeguarded by specialized entities that they also function as an exchange agent, where a user can go and exchange their token for gold.

Stable Coins Backed by Other Crypto Assets

It is a method that has become popular as smart tool technology within some Cryptocurrencies is further developed. And it is that this modality makes use of a fairly complex system of smart contracts that revolve around a closed financial system to avoid speculation and thus keep the stability of the currency always under control.

It was created with the purpose of being the perfect Stablecoin within the Cryptocurrency ecosystem and thus leaving behind the dependence on physical assets such as Fiat money.

A very clear example of this type of coin is the DAI, which makes use of multiple collaterals in different Cryptocurrencies. Despite the fact that DAI does not make use of fiat currency collateral, the DAI price always maintains its value of 1:1 with the US Dollar being one of the most used stable tokens by enthusiasts.

Stablecoins with no asset backing

Stablecoins based on this modality are perhaps the least common, and you may wonder how you can maintain the value of a stablecoin without using another asset. And it is that this method makes use of seigniorage shares, which is a system that works through smart contracts, where the same Cryptocurrency works as a kind of central bank.

It works through the law of supply and demand and thus controls the flow of new tokens or the burning of old tokens to maintain a constant or stable value. An example of this type of Cryptocurrency is USDX which works under this methodology


Why use stablecoins?

The creation or arrival of stable currencies originated from the need to solve a problem that has been immersed in Cryptocurrencies since Bitcoin was created, and this problem is the great volatility in the prices of these digital assets.

Before the arrival of stable coins, it was very complicated for some users of some Cryptocurrencies the simple fact of carrying out a transaction, since sometimes some Crypto assets took up to 15 minutes to carry out the respective confirmations, and in this window of time that currency could lose or gain value.

Thanks to this type of digital asset, you can use strategies that help safeguard the value of an investment, this is known as freezing Crypto assets, where the most volatile Cryptocurrencies such as Bitcoin are used for this practice. Where the balance of a volatile digital asset is converted to a stable currency when the price of this asset plummets, thus saving the investment from falling prices.

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The most used stable coins are Tether and USD Coin, and both are found in the Ccoins Cryptocurrency catalog where you can buy or sell your stable coins at the best price.

Of course you do, and not only that, sending in stablecoins is much faster and cheaper than using international remittance services since they charge high commissions and fees.

It depends on the situation in which the price of the Cryptocurrency finds itself, in this case Bitcoin, since it is a very good idea to freeze when the price of the Cryptocurrency begins a downward trend, but it is a bad idea to freeze when the price of the Cryptocurrency has been on the rise, it should be noted that this strategy is generally used in emergency situations when the price of a Cryptocurrency plummets.

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