The crypto space is highly volatile. Charts go up and down every day, traders are awake 24/7, checking their Blockfolio apps and making sure not to miss the next swing, and everyone, everyone is talking about the market moves. At some point, volatility and the market relying on hype is good – after all, this is what gives us all an opportunity to play from time to time. On the other hand, cryptocurrency being so changeable becomes a massive stop on the way of mass adoption.
Imagine being a merchant accepting cryptocurrency as a payment. Every day somebody ends up in a loss – either you or your customer. Both of the options are not quite favorable. Another example – you are a trader. With everything going down on the market, you need a safe and stable bay to wait for the storm to end. Is it fiat? Going crypto-to-fiat and back every time something happens is costly and overall inconvenient, isn’t it? There needs to be a solution for both of these issues (as well as some other ones), and there is one. It’s called Stablecoins.
Stablecoins are a type of cryptocurrency. Just like Bitcoin, Ethereum, or Monero, stable currencies are based on a blockchain. However, unlike their more traditional peers, stablecoins are designed to mimic the value of fiat or other valuable items (gold, oil, etc.). The main goal behind the creation of stablecoins is allowing crypto users to transfer value rapidly and on the cheap while maintaining fixed prices.
There are several ways for stable cryptocurrencies to be pegged to real-world assets and maintain their price. Let’s take a closer look at the types of stablecoins and how they work.
Stablecoins are different. There are several types, depending on which asset the coin is pegged to. Here are the major ones.
This is certainly the most popular type of stable currencies. Usually, the coins are directly backed by fiat currency of choice in 1:1 ratio. To make sure the price remains stable, the issue needs to hold an equal number of fiat in a special reserve. If an issuer decides to issue one million YEN tokens, they will need to hold one million Yens in a reserve. Pretty logical. There is one thing that is questionable about fiat-collateralized currencies – the issuer that creates the currency needs to be ultimately trusted.
Swapzone offers top stablecoins on board, including but not limited to, True USD TUSD – the first token to be backed by the US Dollar. To know a little more about stablecoins and try it out for yourself, you can always get some TUSD for any other supported crypto asset.
Here is how you do it:
Now, you have successfully onboarded the stablecoin train!
Besides the usual fiat-backed coins, including TUSD we have just given an example of, there are currencies backed by other assets. There are coins and tokens backed by other cryptos (cryptocurrency, in this case, is used as a collateral). This type of asset is way more decentralized, but it should be said that everything depends on the monetary policy of the project that is determined. You are to trust all the participants of the network, as they take part in governance.
There is a simpler way – backing the currency by valuable assets (we have mentioned this before). The coins can be pegged to gold, oil, diamonds, and other quite obvious items. The system will work the same as with fiat-backed coins – the issuer needs to have the asset in the vault somewhere.
There might be some issues of trust when we are talking about stable cryptocurrencies. However, the addition of assets like TUSD to the market solved a major problem (and a feature you can’t escape) of the crypto market – its ultimate volatility. Stablecoins allow users to pay, manage the risks of trading, and transact in a more traditional way. These coins are considered a powerful tool of mass adoption, serving the cases that were not there before.