What You Need to Know About Stablecoins
Innovation has always been a key to revolutionizing the world economy. The introduction of cryptocurrency — a safe, secure and cryptographic form of trade was anticipated to transform the digital monetary system. However, the volatile nature of bitcoin and other cryptocurrencies has hampered the growth of traders or the overall crypto market. This is when asset backed cryptocurrency development comes into play. Asset-backed tokens or stablecoins are immune to the volatile cryptocurrency market.
Introduction of stablecoins
A stablecoin is a token whose value is pegged to some other currency or an asset like gold. Currently, the majority of stablecoins are pegged against the US Dollar because it is regarded as the world’s leading fiat currency.
The origin of stablecoins is mostly due to two main reasons — volatility in the crypto market and careful exploration of the fiat currencies. Stablecoins allow investors to fully enjoy the benefits of transactions without any regulatory hurdles.
Classification of stablecoins
Stablecoins are classified into four main types, including the following:
- Fiat-collateralized stablecoins
Fiat backed stablecoins are usually backed in the ratio of 1:1 which signifies that 1 unit of stablecoin is equivalent to the 1 fiat currency. It involves the authority of the government thus its value remains stable. Fiat-collateralized stablecoins are a centralized form of currency and require strong trust, regulating and auditing agency.
- Cryptocurrency-collateralized stablecoins
These types of stablecoins are backed by cryptocurrencies. This attribute counts on decentralization which enhances the reliability, transparency and security of stablecoins. There is no single individual or agency which governs or controls the funds. It is high on liquidity as it can be remodeled into the underlying asset at a fast pace.
- Commodity-collateralized stablecoins
The third type is the collateralized stablecoins which are also quite popular among the traders. These are not backed by any cryptocurrency or fiat currency; instead, they are pegged to an asset, like gold, diamond, Swiss real estate, stock or any other form of asset. They fall into a centralized form of structure and require auditing from time to time.
- Backed by non-collateralization
There is a type of stablecoin wherein the stablecoins are backed by some algorithm, smart contracts or any other upcoming technology. Algorithms keep up the supply of money and there is no dependability on any form of a central agency.
Highlights of stablecoins
Before you begin with asset-backed cryptocurrency development, it is good to be well-versed with the benefits of stablecoins. So let’s get along with the major highlights of stablecoins.
- Stability: As cryptocurrencies are majorly unstable, a person holding cryptocurrencies may be very rich one day and encounter a huge loss the next day with the same number of cryptocurrencies. The stable nature of stablecoins saves individuals from instant loss.
- Decentralized currency: Many enthusiasts claim that stablecoins are just recreating a different variety of cash. But that’s the half-truth. Stablecoins work on the mechanism of tracking the value of the US dollar or any other fiat currency and then tend to create the value of stablecoins. The proper structure of stablecoin works on the decentralized phenomenon.
- Buying stocks with stablecoins: There is an interesting option available nowadays to buy in exchange for stablecoins. These are considered a haven just like a USD or any fiat currency. So even marketplaces let you buy stocks directly with stablecoins.
- Hedging: Stablecoins let you hedge your risk of cryptocurrencies. Let’s say you have 1 BTC which is currently valuing $8000 and you anticipate that its price will go down in the near future. So what you can do is you can exchange your BTC with the UDS backed stablecoins to hedge your risk. By doing this, you can safeguard against the decreasing value of bitcoins and you can end up buying more BTCs in the future when its price is low.
- Blockchain-based tokens: Stablecoins are mostly blockchain-based. They work on a mechanism of decentralized ledger technology which boosts up the security and transparency of the transactions.
A complete stablecoin development journey
Stablecoins are quite in a lucrative position and are gaining mass adoption. If you are looking to build your stablecoin, connect with our stable coin development company.
Our blockchain engineers follow a design-thinking approach — from ideation to coin development. Besides, we offer all-inclusive solutions like white paper creation, landing page design and marketing to reinvigorate your project for long-term success.
Connect with our subject matter experts for an obligation-free quote.