What is a Stablecoin?

Stablecoins are digital assets designed to mimic the value of fiat currencies such as the dollar or the euro. . It allows users to transfer value cheaply and quickly anywhere in the world while maintaining price stability. Stablecoins, also known as stablecoins or stablecoins in Turkish, serve as a much-needed antidote to price fluctuations in cryptocurrency markets. Most of these digital currencies are collateralized by an underlying asset to ensure price stability.

For example, a stablecoin likeTether (known as USDT) is backed on a 1:1 basis with the US dollar. For each unit of USDT in circulation, $1 needs to be set aside and held in reserve by financial service providers. Alternatives include TrueUSD (TUSD) and USD Coin (USDC). It seems that with this new technology, the possibilities are endless. Some stablecoin projects have pegged their digital assets to precious metals or other cryptocurrencies.

Types of Stablecoins

Stablecoins can be categorized according to their working mechanisms:

1. Fiat Secured Stablecoins

Fiat-backed stablecoins, as the name suggests, are backed by the sovereign currency such as the pound or the US dollar. This means that in order to issue a certain number of tokens of a particular cryptocurrency, the issuer must offer the same amount of dollar reserves as the collateral. Cryptocurrencies backed by dollar deposits include TrueUSD and Tether (USDT).

2. Crypto Secured Stablecoins

The value of crypto-collateralized stablecoins is pegged to the value of other cryptocurrencies. In this case, since the underlying asset is also a cryptocurrency, it can be traditional and at the same time highly volatile.

3. Unsecured (Algorithmic) Stablecoins

Unsecured stablecoins are those that do not involve the use of any reserve assets. Instead, their stability is achieved through a mechanism that works like a central bank. For example, the cryptocurrency base coin uses a consensus mechanism to determine whether to increase the supply of tokens according to need.

Advantages of stablecoins

The main advantage of stablecoins is their potential to provide an exchange environment that complements cryptocurrencies. Due to their high volatility levels, cryptocurrencies have not been able to gain widespread use in everyday applications such as payment transactions. By providing a higher level of predictability and stability, these stabilized currencies solve this ongoing problem.

Stablecoins can also play a role in integrating cryptocurrencies with traditional financial markets, acting as a hedge against volatility. As it stands, these two markets exist as separate ecosystems with little to no interaction. With a more stable digital currency available, it is very likely that cryptocurrencies will see increased use in the credit and credit markets, which until now have only been dominated by state-issued fiat currencies.

Differences Between Cryptocurrency and Stablecoin

Cryptocurrencies as a medium of exchange are technologically perfect, but when a transaction takes place, the value of the coins can be much more or less than when they were sent.

However, stablecoins do not have such a problem. These assets see negligible price movement and closely monitor the value of the underlying asset or the fiat currency they counterfeit. Therefore, they serve as safe-haven assets in the midst of volatile markets. For example, many financial institutions currently charge astronomical transaction fees, often when making cross-border transfers or converting one fiat currency to another, and payments can take days. Popular stablecoins allow transfers to take place instantly and much cheaper on the blockchain.

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