Very few assets in the world are as volatile as cryptocurrencies. Their pricing tends to fluctuate, and when you least expect it, the pricing skyrockets. The pleasure subdues when you have a lot at stake with the flurry of emotional highs and lows. For investors who are looking to buy goods and services, stability is an essence. Crypto-sphere is lucrative in nature, but without stability, it does seem like a wild hunt.
In order to make it more suitable, stakeholders came up with the concept of “Stablecoin.” If you have heard the name Tether, you know what we are talking about. If you are looking to buy USDT in UAE or you are just dipping your toes into the world of crypto, read on to find out more about the purpose of stablecoins.
Stablecoins are cryptocurrencies whose value is pegged to another currency or commodity like metal. Stablecoins have been developed to provide an alternative to highly volatile cryptocurrencies like Bitcoin (BTC), which has invested in cryptocurrencies highly unsuitable for investors. In order to serve as a medium of exchange, a currency which is not legal tender must remain relatively stable in nature.
This is imperative because it can only assure the ones using it of its purchasing power return in a short span of time. The traditional forex trading of fiat currencies shows a rare movement of 1%, that too occasionally. As their name implies, stablecoins aim to address the very problem of stability for cryptocurrencies and hold a steady value in various manners.
There are various kinds of stablecoins in the market. Following is a brief description of each to help you understand the point of marketing this form of currency.
Stablecoins that are fiat-collateralized in nature maintain a reserve of a fiat currency or currencies like U.S. Dollars or Yen as collateral allowing stablecoin to maintain their value. Other options of collateral include precious metals like gold and silver and commodities like crude oil. However, the most common fiat-collateralized stablecoin has been reserved for U.S. Dollars.
One type of Stablecoins is those that are collateralized by cryptocurrencies. Since the reserves held for cryptocurrencies tend to be highly volatile in nature, these kinds of stablecoins are over-collateralized. In other words, the value of cryptocurrency, which is held in reserves, tends to exceed that of stablecoins issued.
Algorithmic stablecoins are the ones that may or may not have reserved assets. The primary distinction associated with Algorithmic stablecoins is the fact that they control the stability by an algorithm. The algorithm is a computer program that runs present formulas.
The purpose of stablecoins is that they maintain stability in two imperative areas associated with digital payments that do not acquire volatility. An example is Decentralized Finance or Defi, an online financial market that does not have the supervision of a central bank. It relies on cryptocurrencies for payments and loans.
Due to that reliance, Defi or Decentralized Finance relies on cryptocurrencies for payments and loans. Due to this reliance, the market has the potential to change rapidly in size with fluctuation in pricing or changes in transaction fees for some cryptocurrencies. However, the chances for that in the case of stablecoins are much less.
Tether was specifically designed to bridge the gap between fiat currencies and cryptocurrencies such that stability and transparency are provided to the users with fewer transaction charges. Tether is pegged against the U.S. Dollar and maintains a 1-1 ratio in terms of value with U.S. Dollars.
However, Tether has not provided any guarantee for rights of redemption or exchange of Tether for the U.S. Dollars. Tether is one of the major sources of liquidity for the cryptocurrency market. In February 2021, 57% of the bitcoin trading was in USDT.
USDT assists in cross-border transfer by improving the settlement system by removing the need for currency conversion fees and settling the transfer in minutes. Depending on which blockchain you use for the transport layer, USDT can almost cause no charges. USDT transfers are also final, which means once the transaction has been made, the financial institution cannot restrict access to funds.
Whether you are still contemplating investing in cryptocurrencies or deep in the crypto-sphere, stablecoins are the preferred notion of payment and performance. These maintain their value throughout financial transactions and despite the fluctuations of cryptocurrencies. Safe Crypto-ing!