Reblox Explains: What Are Stablecoins?

What are stablecoins and how are they different from most cryptocurrencies?

A stablecoin is a type of cryptocurrency designed to maintain a fixed value over time.

You’ve probably heard of them already. Stablecoins boomed in 20–21 and after the recent events in the crypto market — especially the Terra UST crash — they’ve been all over the news and social media. But what are they exactly and how do they differ from most cryptocurrencies?

Stablecoins

Cryptocurrencies are decentralized, private, and secure, but their prices are unpredictable and tend to fluctuate in a rather volatile way. This brings users second thoughts before investing their money in them — and is where Stablecoins take the spotlight.

Stablecoins sort out price fluctuations by “tying” their value to another asset. They are pegged to the US dollar so their value doesn’t change as they remain tradeable in any centralized or decentralized exchange

Stablecoins provide convenience, privacy, and the same security as crypto while offering the stability of “real” money.

This makes them useful for anyone who wants to operate fast and at a low price without dealing with Bitcoin’s volatility or even manage their business by making the most out of the Blockchain. They’re also practical for traders who need a safe stop between alt coins and BTC without the need of withdrawing to cash or Fiat money.

How do they work?

Stablecoins maintain their price through algorithms or fiat collateralization.

Fiat Stablecoins

These tokens are pegged to reserve assets like dollars, gold, and even government bonds. For any USDC, BUSD, or USDT in circulation, there should be one US dollar in reserve in a vault or bank account. There are Audit companies dedicated to checking that these reserves actually exist. The pros, the tokens are more stable. The cons, it’s hard for a company to prove they own the total amount of collateral.

Some other Stablecoins are crypto collateralized in other tokens. This is the case of DAI which is backed by ETH.

Algoritmic Stablecoins

These tokens are algorithmically pegged to the US dollar through a Smart Contract. They program an algorithm that adds more liquidity when more users buy and burn some of the coin supply to create scarcity when users sell. Even though they’re not supposed to be volatile, they can be riskier than stablecoins backed on assets — you probably thinking of the UST case as you read this.

Stablecoins can provide stability in the crypto ecosystem. Still, it’s advisable to do your own research on how each token works before you start investing

Have you immersed yourself in the world of stablecoins? In which token would you invest?