In this article, we will explain what stablecoins are, their types, and how they can be used. We will also briefly cover some ways to make profits using these assets, as well as some examples.
What Are Stablecoins? Why Are We Using Them?
Stablecoins are cryptocurrencies whose value is directly linked to another asset.
They are designed in such a way as to maintain a fixed price.
The most common example would be Tether or USDT. Its price is pegged to the US dollar, so it can be traded at a 1:1 ratio.
The major advantage of these coins is that they are not susceptible to crypto-specific volatility, so you can trust that 1 USDT will still be worth $1 in 5 years.
The other advantage would be that, due to the fixed price, stablecoins can be introduced into trading pairs, such as Bitcoin/USDT, which makes it possible to relate the BTC value to that of the US dollar.
Types of Stablecoins
There are mainly 3 types of stablecoins, as follows:
- Those that reflect the price of a traditional currency, such as the dollar or the euro, and provide liquidity through cash reserves. These are known as fiat-backed stablecoins.
- Stablecoins whose price corresponds to that of a traditional currency, through decentralized mechanisms on blockchains that allow users to generate stablecoin tokens by using other cryptocurrencies as a collateral deposit. The best example would be DAI. This category is known as crypto-backed stablecoins.
- The third and last type is represented by those stablecoins that use other commodities as collateral, such as gold, platinum, and so on. The best known such coins are Tether Gold and Paxos Gold, labeled as commodity-backed stablecoins.
How to Use Them
One of the purposes of these cryptocurrencies is to facilitate international transactions as quickly as possible.
Traditionally, if you want to transfer money to an account abroad, you would use services like TransferWise.
The problem with these is that processing a transaction takes up to a few days.
Using stablecoins, the transaction takes place in just a few seconds, thanks to blockchain technology.
You can also take advantage of the transaction speed by changing other cryptocurrencies to stablecoins once their price starts to drop, thus securing your funds.
How to Make Profits Using Them
- By storing them on exchanges.
Like any cryptocurrency, they need liquidity to be traded.
By storing tokens on exchanges, you will provide them with liquidity, for which you earn interest, corresponding to the transactions that take place using your currencies.
- By lending them on centralized platforms, such as BlockFi, or decentralized ones, such as Aave.
- By staking them.
Stablecoins can be considered a new and popular exchange currency. They can be used in the same way as fiduciary currencies, with the added advantages of crypto assets; plus, they can be purchased directly from an exchange. They are also backed by some values, so there should be no worries about price volatility.