What is stablecoin?

Stablecoin is any cryptocurrency whose market value is pegged to an asset with a steady price such as a fiat currency, commodity or physical asset, to ensure some price stability.

Stablecoin’s advantages

You are certainly aware that the crypto market is traded with high volatility. Therefore, digital assets are viewed as extremely risky investments

Still, not all crypto tokens are prone to sharp price swings. Unlike conventional cryptocurrencies, a stablecoin whose value is tied to physical assets easily withstands periods of strong turbulence in the crypto market. If tokens are converted into stablecoins before or even during a roller coaster, an investment portfolio will be safeguarded from huge losses.

Importantly, the fact of stablecoin’s pegging to fiat currencies or physical assets in no way negates all the advantages of popular cryptocurrencies. This type of crypto assets represents a convenient medium of exchange and enables hassle-free payment transactions.

What kinds of stablecoins exist?

- Fiat-collateralized stablecoins are backed, for example, by the US dollar, the euro or the pound sterling.

A fine specimen of this type is Tether (USDT) whose cost is pegged to the US dollar. Nowadays, it is the largest stablecoin among all available ones. In terms of market capitalization, it lags behind such heavyweights as Bitcoin (BTC) and Ethereum (ETH).

- Physical asset-collateralized stablecoins are backed by a physical commodity such as precious metals like gold, crude oil or even real estate.

Commonly, the most popular stablecoins rest on gold reserves. The most-traded stablecoins are usually backed by reserves of gold. So buying a token, you automatically become the owner of 1 troy ounce or 1 gram of precious metal in particular bullion, though the level of security may be different. Among the popular gold-pegged stablecoins are Digix Gold, Tether Gold, and Paxos Gold.

- Crypto-collateralized stablecoins

The blockbuster in this category of stablecoins is MakerDAO. The token is pegged to the US dollar but backed by Ethereum through a smart contract. In other words, to issue a new token, the company should secure its value by a new ETH in the 1:1.5 ratio.

- Algorithmic stablecoins

These stablecoins may not hold reserve assets. The stability of their market value is sustained by special algorithms, smart contracts or users’ transactions, for example, arbitrage trading. Market quotes of such coins are less volatile than prices of secured stablecoins. The most popular algorithmic stablecoins at present are Ampleforth, Empty Set Dollar, Basis Share, and TerraUSD.