Bitcoin and other cryptos have several benefits to offer investors and traders, and users and that include making transactions openly with no trust issues or the need for a third-party intermediary. However, the wild volatility of these cryptocurrencies can be the most obstructing roadblock for users.
This is where stablecoins come in. Stablecoins have cemented their status as a vital part of the crypto ecosystem. That is due in part to the volatile nature of speculative cryptos like LTC, BNB, BTC, ETH, etc. Even though stablecoin is also a cryptocurrency, its asset is fixed to the value of other asset classes like fiat or gold for price stability.
So what is a stablecoin? How do stablecoins work? Are stablecoins safe? We will now give all these answers to you and of course, here you’ll also find a list of stablecoins to choose from.
What are stablecoins?
The purpose of stablecoins is to offer price stability. This group of cryptocurrencies is often supported with a reserve asset. Over the years, stablecoins have developed to be the most prominent and important class of cryptocurrencies.
Stablecoins provide instant processing and privacy of payments with cryptocurrencies. They also offer stable or volatility-free valuations of fiat currencies. The very essence of stablecoins is to stabilize the volatility of cryptocurrency prices by pairing them with a fiat currency or other more stable assets.
Organizations operating stablecoins always set up reserves to store assets backing the stablecoin. For instance, $1 million of the real asset can be used to back up a million units of stablecoin.
In other words, these stablecoins are fixed to real-world assets, which are reserved to serve as collateral for the stablecoin. A stablecoin transaction that involves a stablecoin holder withdrawing his asset results in an equal amount of the asset taken from the reserve.
How do stablecoins work?
Apart from being able to stabilize price volatility, stablecoins are also supported by multiple sources of assets. It could be a traditional currency like the US dollar, commodity, precious metals, or algorithmic functions, or other cryptocurrencies. However, the risk level for stablecoins is greatly influenced by its backing.
- Fiat-Backed Stablecoins
For fiat-backed stablecoins, you can use your fiat currency to trade for a stablecoin paired to that fiat currency and retrieve it later for your initial real-time deposit.
Fiat stablecoins are the most stable of all stablecoins when it comes to price volatility, little to no changes are seen in its price.
- Crypto-Backed Stablecoins
These stablecoins are supported by other cryptocurrencies. Since crypto-assets (High Price Volatility) are used to back these stablecoins, they are over-insured to maintain the price value.
- Precious Metal-Backed Stablecoins
Precious metals like gold are used to maintain the price value of these stablecoins.
- Algorithmic Stablecoins
Unlike other stablecoins, algorithmic stablecoins aren’t backed by any asset. The algorithmic stablecoins operations have proven to be the hardest to understand. Algorithmic stablecoins price values are kept in check using a computer algorithm.
All in all, to operate crypto successfully and make a profit, you should know what stablecoins on the market are the most popular. To see the list of popular and reliable stablecoins and learn how to buy or exchange stable cryptocurrency, visit Swapzone — the best place where you save your time and money when exchanging crypto.
Also, check out the FAQ where you will find the answers to the most burning questions concerning stablecoins.
