What is a stablecoin?

Coinmatics

Published in

Game of Life

5 min readDec 23, 2019

Stablecoins are getting more and more popular these days.

The number of currency projects is getting bigger each year.

However, not everybody understands the way stablecoins operate, the idea behind it, and the concept. The currencies carry out their functions that shell not be overlooked.

Introduction

People live inside the modern industrial revolution where global and financial economies are getting into the virtual space.

Digital payment methods based on the latest technologies are replacing fiat money.

Cryptocurrencies are used to work with monetary operations. A cryptocurrency is virtual money. Besides that, there have been created blockchain assets — stablecoins.

What is a stablecoin?

A stablecoin is a cryptocurrency having its fixed price. Such a currency is fully backed by a traditional asset such as gold, silver, oil, or fiat currency.

The basis of such a coin is a blockchain. The coins are used by financial exchanges for easy and accessible transferring of large sums of dollars, and also for trading on an exchange.

The main goal of a stablecoin is to operate as a traditional monetary asset with all qualities associated with it. The tokens are stable since their prices are pegged to real assets. Virtual currencies are designed for making changes in the cryptocurrency industry.

Types of stablecoins

Cryptocurrency exchanges are just beginning the conquest of the financial system. Therefore, a lot of virtual financial systems, currencies, and types have appeared lately. And as for stablecoins, there is a particular classification.

Stablecoins backed by fiat currencies.

The working principle of the coins is as follows: the number of coins issued is equal to the value of real money in use. At the current stage of development, USD is used. However, the developers have been trying to create a stablecoin on the basis of other currencies.

2. Backed by cryptocurrencies.

Coins of the type are more reliable basic digital instruments. Bitcoin and Ripple are used in most cases, but sometimes stablecoins are collateralized by other cryptocurrencies. Such backing aims to increase the credibility of the coin; thus, the volatility issue is not solved.

3. Non-collateralized stablecoins.

It is a rear type; the owners of such coins aim to receive an additional profit in the form of seigniorage. Seigniorage is a profit received by a government increasing the amount of money in circulation.

Its essence is in the fact that the customers make transactions via the applications owned by the owner of the currency, paying a commission fee charged for it.

Operation of stablecoins

As a rule, stablecoins operate the same way fiat currencies do. They are available for exchange, but also each of them acts as a store of value and a unit of account. Any stablecoin is tied to a stable asset. This collateralization defines a coin’s identity.

The stablecoins are backed at a 1:1 ratio. 1 token is equal to 1 USD, meaning that it is possible to buy with 1 token everything that costs $1. Being exchanged, the number of tokens corresponds to the amount of the fiat.

Binance and stablecoins

The exchange has long been working on the cryptocurrency market. It ranks number one among the projects of the kind. Binance works with the top coins, such as Tether, which is a popular coin pegged to USD.

Binance USD.

The exchange announced the issue of some new stablecoins. The company has already had BNB and now, it is time for a dollar-tied stablecoin.

BUSD is a new coin on Binance. One can not only trade it; it is also possible to purchase other assets with BUSD. It is possible that BUSD will become the main currency on the exchange.

Popular stablecoins

The following are three the most popular stablecoins:

Tether. The stablecoin is backed by USD, Euro, and other fiat currencies. It is based on transparent and accessible blockchain technologies. At the press time, the coin is ranked 4th among all cryptocurrencies, with a capitalization exceeding $4 billion and $30 billion of an average daily volume. The token operates on the Ethereum blockchain.
TrueUSD. It is a standard ERC20 stablecoin pegged to dollar. 1 TrueUSD is equal to $1.
BitCNY. It is a stablecoin based on the BitShares blockchain and begged to yuan. The ratio is 1:1.

Conclusion

Cryptocurrencies are designed to provide justice and display the real value of money in the financial world.

Such currencies will provide customers with protection against abuse by different financial institutions.

Cryptocurrencies cannot be used as means of exchange and stores of value; therefore, stablecoins have come into play. Their main aim is to bring stability with the help of fiat currencies. Stablecoins are expected to become widely adopted in the future, but currently, they are on the formation phase.

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