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What is a stablecoin?
Stablecoins are cryptocurrencies that maintain a steady value over time by pegging their value to another asset, typically a currency like the U.S. dollar or the Euro. Price volatility associated with most cryptocurrencies like Bitcoin is not an issue when it comes to stablecoins as their price remains stable or nearly so all the time.
According to Defillama, as of the time of writing, the total market capitalisation of stablecoins is $127B, amounting to 11.29% of the total crypto market capitalisation. The most popular stablecoin is the Tether USD(USDT).
How do stablecoins work?
Stablecoins peg their market price to another asset, such as a fiat currency, another crypto or a physical commodity such as gold and silver. For every unit of stablecoins, there is a corresponding backup asset. You can redeem your stablecoins at a ratio of 1:1 for the underlying asset. Exceptions include algorithmic stablecoins and multi-collateral DAI, which uses algorithmic and smart contracts mechanisms, respectively.
Types of stablecoins
- Fiat backed stablecoins
- Commodity backed stablecoins
- Crypto backed stablecoins
- Algorithmic Stablecoins
- Hybrid Stablecoins
HOW TO use Stablecoins
Stablecoins have a variety of utilities. These utilities include the following.
Store of value: Stablecoins can serve as a store of wealth, protecting your fiat currencies against devaluation and the bottlenecks of the traditional banking system. There are no hidden fees; your stablecoins are stored in wallets and retrievable immediately if you need them.
Hedging and Risk Management: Most cryptocurrencies, like Bitcoin, experience significant price fluctuations. Thus, it would be best if you diversified your portfolio to mitigate large downside price fluctuations. Stablecoins are pegged at a near-constant value; hence your portfolio can remain afloat in a dropping market if you diversify your portfolio.
Trading: Stablecoins are useful for people who want to make money from trading pairs of cryptocurrencies. Most trading pairs have stablecoins as their base coin making it easy for traders to initiate and profit from trades.
Cross-border payments and remittances: Stablecoins offer a more efficient way of interacting with the global economy by breaking down the barriers associated with fiat currency payments between countries and continents. Being able to transact with anyone anywhere, 24/7, is surreal.
Decentralised Finance (DeFi): Stablecoins are engine oils in the machines of DeFi. Stablecoins are used as collaterals for borrowing, staking, swaps, and liquidity pool contribution, to mention a few. You can unlock the financial fortune bounties Defi offers using your stablecoins as a key tool.
Stablecoins value remains pegged in ideal conditions. To benefit from stablecoins maximally, you need to know how to use them.
About the author
Adebajo Glory is a certified professional blockchain freelance writer with several published articles on blockchain architecture and management.