What is a stablecoin: advantages and how are coins supported

What is stablecoin?

06 Dec, 2019 Colin Baseman

Stablecoins are digital money secured by valuable assets. These may be gold, fiat currencies and oil. Such coins are based on blockchain, although many experts are questioning the stable coins’ decentralization level.

Stablecoin main features

The stablecoin’s working principles are much alike fiat money. They may be exchanged for other assets, as a means of capital storage or goods purchase. Their 1 to 1 cost can be fixed to some values. This ratio keeps stable throughout the whole period, regardless the market changes. Though, minor rate fluctuations are possible.

The cost of stablecoin directly depends on the attached asset’s position. For example, the dollar strengthening will result in value increase for cryptocurrency pegged to it. Though, when American currency becomes cheaper, the corresponding coin’s value sees a decrease as well. Nowadays, all the variety of stable cryptocurrencies may be divided into 3 groups:

  1. Pegged to physical values or fiat money
  2. Not pegged to other currencies or values. The cost depends on digital coins issue.
  3. The price pegged to other cryptographic currencies 

Stablecoins secured with fiat money

This is the simpliest type of coins with stable value. It works as a special kind of IOU. When pegged to US dollar, the USD works as collateral and keeps the cryptocurrency rate fixed.

Stablecoins secured with fiat money have the following advantages: 

  • Ease to use. Since stablecoins are pegged at 1:1 ratio to certain assets, it is rather easy to determine the amount of coins needed to purchase certain goods, as well as to understand the available funds amount.
  • High stability. This cryptocurrency type is not affected by crypto market fluctuations. Any sudden rate collapses will not affect such coins in case the asset they are pegged to is stable and holds its positions.
  • Resistance to hacker attacks. Currency reserves are usually kept by a financial institution. It is extremely difficult to hack its system and steal the savings. 

The disadvantages of stablecoins secured with fiat money are the following ones: the high level of state regulation and centralization, as well as the susceptibility to inflation processes.

Stablecoins pegged to cryptocurrencies

Stablecoins pegged to cryptocurrencies have the following advantages:

  • Maintaining the principle of decentralization
  • Rates supported by market participants and investors, but not government facilities
  • Simplified process of exchange to other cryptocurrencies

Though, they have the following weaknesses: in case the currency which it is pegged to faces major issues, the coin self-destructs; high volatility and the need to form an excess reserve.

Stablecoins are playing a big part in cryptocurrencies world. They are linking digital money with the real world and facilitate trading on crypto exchanges that do not use fiat currencies. Investors like using stablecoin when investing in an asset, since it helps avoiding issues with its purchase, storage and subsequent sale. Stable coins are indispensable in such cases. Try to benefit from it yourself. You may buy a cryptocurrency that is pegged to gold or oil. This will let you to make a reliable investment and get profits in case the asset’s price increases.