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What is a Stablecoin? All you need to know

FPJ Web Desk | Updated on: Thursday, May 12, 2022, 03:01 PM IST

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What is a Stablecoin?

A stablecoin is a type of blockchain asset that doesn’t derive value based on its market cap like other cryptocurrencies. Instead, these unique tokens are pegged to other assets. These assets can be real-world items like fiat currency or gold. They can also be digital or smart contract-based. Understanding what makes a stablecoin, and how you can use one when trading, can help you to secure more profits in the future.

Advantages of Stablecoins

Stablecoins were created to prevent volatility in the market. These tokens play a vital role in the digital economy today. There are stablecoins backed by billions in assets. The most common use of stablecoins today is to make payments or to escape market downturns.

Stablecoins are ideal for payments because they simplify the accounting for transactions as everything is in fiat currency denominations. Traders use stablecoins to exit out of the volatile cryptos during market downs. This approach is ideal for traders because it enables them to easily strengthen their positions.

Converting your crypto into stablecoins is usually more cost-effective than converting it to fiat currency. Traders will convert their coins into stablecoins and then wait for the market to finish its correction. They then buy back the same asset at a lower cost by converting their stablecoins back into the crypto they traded out. This strategy is easy to do and is used by millions of traders daily.

Types of Stablecoins

There are a lot of different types of stablecoins available today. These coins all operate slightly differently on the back-end, but most seek to retain value close to $1. The stablecoin evolution has been interesting with the earliest stablecoins leveraging other tokens to provide more transparency. Here are some of the most popular types of stablecoins in use today.

Fiat Backed

Fiat-backed stablecoins are the most popular type of stablecoin in the market currently. These tokens have been a major hit ever since Bitfenix issued TetherUSDT. Fiat-backed stablecoins have the advantage of familiarity. These tokens are convenient but not ideal for savers. For one, they suffer from the same inflation as fiat currencies.

Additionally, they require users to have an enormous amount of faith in the issuing party. They will require the party to provide audits from unbiased third parties to ensure their commitment. These shortcomings drove developers to innovate other forms of stablecoins such as crypto-backed projects.

Crypto-Backed

Crypto-backed stablecoins operate similarly but use all blockchain-based assets. They can accomplish this in a couple of ways. In some instances, the token will automatically adjust its reserves to ensure that it retains its stability. In other protocols, the coin may adjust its total supply to provide stability. Both methods are effective and in use today.

Commodity Backed

Commodity-backed stablecoins are another early comer in the market that has continually evolved since day one. There are all types of commodity-backed tokens. Gold-backed tokens are the most popular. You also have diamond and silver-backed projects in operation today. Commodity-backed tokens require users to have trust in the issuing party.

Multi-Asset Backed

The most advanced stablecoins in use today are multi-asset-backed commodity coins. META 1 Coin is a perfect example of the evolution of stablecoins. The token derives value from a basket of gold-related assets. This structure makes META 1 Coin among the first self-appreciating multi-asset-backed tokens to gain popularity. For savers, these tokens are a game-changer as they eliminate inflation.

Stablecoins of the Future

The innovative minds in the crypto market continue to push the stablecoin concept further. The META 1 Coin provides the perfect platform for savers to build wealth. Users can leverage the METANOMICs DeFi ecosystem to secure low-risk passive income with zero technical barriers.

Stablecoins are Essential in 2022

Stablecoins are an integral part of the crypto market in 2022. Now that you have a better understanding of their design, you are ready to start integrating some into your trading strategy. Stick to reputable projects to avoid losses and you are sure to enjoy more trading opportunities in the future using these awesome tokens.

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Published on: Thursday, May 12, 2022, 03:01 PM IST