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What Are Stablecoins?

Starting from scratch is never easy, especially when it is about our money, as then we tend to get extra careful. Of course, we work hard to earn our cash, and investing it in something just because it looks good or fun and without any research is not something most people will do. Now, this perhaps best describes why, in the beginning, there weren’t that many people willing to invest in cryptocurrencies, as they were not only something new as there was also plenty of fake news and false info about them. Today, all that changed, and people are more well informed about what cryptos are, what they represent, and how do they work. Of course, there is also plenty of new coins out there which may confuse people, but even so, it just means that the opportunities for us to make some profits by carefully investing in this market are getting bigger.

If you’re a new investor looking to get into cryptocurrencies, the sheer amount of options might be a little too overwhelming at first because today, there are several thousands of coins in which one can invest. Furthermore, there is also the issue of rampant volatility, as it is the main problem and the main risk that comes with almost every crypto. Fortunately, stablecoins exist as a similar alternative to cryptocurrencies.

Cryptocurrencies like Bitcoin and Ethereum both introduced certain innovations that have helped investors to change the way they think about and interact with money overall, not to mention the fact of no third-party involvement. But despite that, the constantly large price changes scare away those who have lower risk preferences or simply don’t have too much capital to start.

In the case of stablecoins, though, they are subject to lesser volatility. Stablecoins refers to cryptocurrencies that are backed by assets, typically fiat currency. But make no mistake, they still have the features of cryptocurrency that make them appealing, making stablecoins a new asset class that investors can dip their feet into without having to take large risks.

Venturing into a new investment class may seem daunting, but luckily there are a lot of tools out there to help you out. The BitiQ App is a beginner-friendly cryptocurrency exchange platform that can help you get started.

But what exactly are stablecoins?

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stablecoin is a digital currency that is tied to another asset. The most common assets are national currencies, but stablecoins can also be tied to high-value assets like gold, platinum, or something else. There are two main types: commodity-backed and fiat-backed stablecoins.

Stablecoins are essentially cryptocurrencies designed to stay at a fixed value, mimicking how government-backed fiat currencies work. This works in contrast to cryptocurrencies, which are also relatively new digital assets but are subject to major volatility that can change the prices within seconds. The true meaning of these new coins is that by using them, one can be assured that there will be no such volatility as with other cryptos. It also means that one will not have to pay high fees for withdrawing their cash.

They are pegged as a more stable asset like fiat currency and were created to counteract and manage the price swings present in most cryptocurrencies like Bitcoin. Stablecoins have also shown to be less affected by market events, unlike cryptocurrencies that are affected by marginal changes in market conditions.

An example of a popular stablecoin is Tether. It is a fiat-backed stable coin, and it currently has the largest market capitalization out of all of them. It is currently priced at one-to-one with the U.S dollar, but its prices ultimately depend on the strength of its reserves. Tether is a centralized stablecoin, which means it is held by an exchange platform.

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Both these stablecoins are governed by a central authority, which comes with the risk of having to trust that they can maintain the balance between their supply of fiat currency (the US Dollar) and their supply of stablecoins. Both must be as close to equal as they can.

However, the concept of stablecoin being governed by a centralized body can be seen as going against the main idea of decentralization, and the question is how people will accept it. The main concern would be the third-party responsible for creating the value of it. In the end, it can be something that people will not be happy about because third-party involvement can cause many possible problems. If stablecoin is backed by a fiat currency, you have to trust that the issuing body has a supply of money that is equal to their supply of stablecoins. On the other side, if they do not have a certain supply, it can lead to our money losing its value and many other problems.

The case is different for cryptocurrency-backed stablecoins, though, and we will try to explain it further now. For example, DAI is a decentralized stablecoin that is backed by a cryptocurrency, which probably sounds even more complicated now, but it is not. It is backed and stabilized by Maker, a smart contract platform made using the application development tools found on Ethereum. It has various dynamic and autonomous feedback mechanisms and knows how to incentivize when acted upon by external actors.

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Here, the main goal for DAI is to try and maintain its values to be as close to the value of the US Dollar as possible. Once they succeed that, it will be much easier to attract new users. DAI is currently maintained on Ethereum’s network, which is known as one of the most secure blockchain networks, right after Bitcoin. This allows people to use their holdings in Ethereum to produce DAI with the help of the Maker platform and without involving any intermediaries. Since there is no third-party involvement, people have complete control over their assets, which makes the transactions more secure and much faster. Because it is not under the control of a single entity, anyone can help maintain the blockchain, and the more users it has, the more it can improve.

The last type of stablecoins is backed by other physical assets, such as precious metals like gold or important commodities like oil. Examples of these kinds are Tether Gold and Paxos Gold, and much more of them. Stablecoins backed by commodities are usually more prone to price changes but are still dependable when it comes to capital appreciation since commodities usually increase in value over the long term. That is the main reason why people choose them when they want to realize long-term capital.

Now, you learned more about stablecoins and their types and the usage of each of them. It is up to you to choose the one that suits you the most and can fulfill your needs, and do not worry because there is no such thing as a wrong choice. It is impossible to say that one type is better than another because we can use all of them for different needs. It is necessary to find a reliable platform and use stablecoins in the safest possible way no matter what your decision is and which of them you choose.