A stablecoin is a type of cryptocurrency created to maintain a stable value. Unlike Bitcoin or Ethereum, which can fluctuate dramatically based on supply and demand, the value of a stablecoin is tied to a stable asset, such as:
- US dollar (USD)
- Euro (EUR)
- Gold
- Other tangible goods or assets.
In other words, a stablecoin is a bridge between the advantages of cryptocurrencies and the stability of traditional (fiat) currencies.
How does a stablecoin work?
To better understand, let’s look at the main types of stablecoins and the mechanisms behind them:
1. Stablecoins backed by fiat currencies
These are the most common and are backed by an equivalent reserve in traditional currency. For example, 1 USDT (Tether) is theoretically backed by 1 USD in the accounts of the issuing company. Learn from our article all about fiat currencies.
Popular examples:
- USDT (Tether)
- USDC (USD Coin)
Advantage:
- Transparency if reserves are audited.
- Values remain stable relative to traditional currency.
2. Cryptocurrency-backed stablecoins
These stablecoins are backed by other cryptocurrencies such as Ethereum. Blockchain systems automate reserve management through smart contracts.
Examples:
Advantages:
- No dependency on a centralized entity.
- Flexibility offered by smart contracts.
3. Unsecured (algorithmic) stablecoins
These have no physical reserves; instead, they base their stability on algorithms that adjust the supply and demand for the currency. In theory, they maintain value through automatic balancing mechanisms.
Examples:
- UST (Terra) (however, recently this method has lost popularity due to major destabilizations).
Advantages:
- Uses blockchain technology exclusively.
- No centralized reserves.
Why are stablecoins important?
These coins have become essential in the cryptocurrency world due to their broad applicability. Here are some of their main uses:
1. Protection against volatility
Cryptocurrencies like Bitcoin and Ethereum are known for their high volatility. By converting funds into stablecoins (e.g. USDT), users can protect their savings or assets from sudden losses.
2. Fast and cheap transactions
They allow:
- Fast international transfers.
- Low fees compared to traditional bank payments.
Example:
You can send 100 USD to a friend in Japan using USDC in a matter of minutes, paying an almost negligible fee.
3. Integration in decentralized financial applications (DeFi)
In decentralized financial ecosystems, stablecoins play a crucial role. You can use them for:
- Secured quick loans.
- Staking interest.
- Various financial indicators for personal management.
4. Global accessibility
Stablecoins allow people in all corners of the world to access simple and fast financial services.
Stablecoin vs. other cryptocurrencies
It is important to compare stablecoins with other cryptocurrencies to better understand the advantages:
Features | Stablecoins | Bitcoin/Ethereum/Other Cryptocurrencies |
|---|---|---|
Volatility | Very Low | Very High |
Useful for payments | Ideal for transactions | Complicated due to high price fluctuations |
Main function | Stability and DeFi solutions | Speculative assets and long-term investments |
Suitable for savings | Excellent | Riskier |
What are the risks of using them?
- Reserve collapse – If stablecoin issuers do not hold sufficient reserves, their stability may be compromised.
- Technical issues – Using smart contracts or interacting with the blockchain can have glitches.
Are you an investor and want to keep up to date with cryptocurrency trends and prices, or interested in buying stablecoins? You can find an up-to-date price by visiting our dedicated page.