Dummy’s Guide to Stablecoins

What is a stablecoin?

A stablecoin is a cryptocurrency that is backed by another stable asset such as fiat currency (USD, EUR, JPY etc), gold and commodities. This is done to reduce the volatility of the coin by backing it with something that has a stable value.

What are the benefits of stablecoins?

Stablecoins were created in order to minimize the volatility of cryptocurrencies. It allows people to use a cryptocurrency that is stabilized and pegged to a specific value. Stablecoins retain the benefits of being a decentralized digital currency — low transaction cost, almost instantaneous transaction times, trustless and outside the control of a single entity — while avoiding price volatility.

For countries where inflation can render the country issued currency into meaningless pieces of paper in a short period, stablecoins can provide a welcome respite from the uncertainty and hyperinflation of a government issued currency.

For traders who want to hedge their investments, they can transfer their crypto holdings to stablecoins if they believe their cryptocurrencies will be dropping in value. Usually stablecoins have an inverse relation to the crypto markets — when they are down, the trading volume and market cap of stablecoins increases and when the crypto markets are up, stablecoins decrease.

What types of stablecoins exist?

There are four main types of stablecoins with regards to the type of collateral that…