What is a Stable Coin?
Stable coins are a relatively new phenomenon in the crypto sphere. These are cryptocurrencies which are dedicated to minimise the volatile behaviour of crypto prices. As a rule, the coins are pegged by stable assets – fiat currencies or exchange traded commodities (e.g. precious or industrial metals).
The very purpose of creating stable coin is understandable: the community needs a greater stability in the market. Cryptocurrencies such as Bitcoin and Ethereum are too volatile to be used sustainably. Imagine the moment when the mass adoption will come. One day you pay $30 for a cab, but the next day you’ll pay 40$. That is not your dream, isn’t it?
So, here comes stable coin to balance the market. With its help crypto investors and traders are able to play short-term on crypto-to-crypto exchanges, for example, by ‘mirroring’ the dollar and thus being able to sell BTC for cash on the exchange that doesn’t deal in USD.
Stable coins bridge the gap between fiat and crypto worlds. The desired customer friendliness allows for redeeming crypto to fiat currencies with no limits, as stable coins are not tied to any institution. Having stocked up on stable coins, one can forget about rates of crypto prices and bottlenecks of crypto-to-fiat conversions for good.
Imagine your sister or brother has moved to another part of the world. Let it be Singapore, whatever. If you send him dollars, it may take loads of time for the money transfer to be carried out, and the bank fees may be high as well. But if you send stable coins instead, the whole process of transacting will be easily tracked. Plus, your sibling will get the same amount, but with much lower fees charged.
Speaking of crypto exchanges, here stable coin acts as a convenient liquidity tool. Many exchanges are suffering from banks’ refusals to deal with crypto-related operations. Thus, many platforms don’t allow fiat deposits. However, when the market gains bearish momentum, users want to trade their fiat assets back. It will be deplorable for the exchange not to provide such an opportunity. Unsurprisingly, stable coin is a key solution in this case.
Stable coins are divided into two categories: coins backed by real-world assets and those based on the algorithmic mechanism. The principle hallmark of the former is that these coins are pegged to an asset and hold one-for-one price ratio. Algorithm-based coins are more complex by nature and include a specific set of rules in their code that match the supply of the token with the demand.
As of today, there are 5 stable coins, including Tether (USDT), TrueUSD (TUSD), USD Coin (USDC), Paxos Standard Token (PAX) and Gemini Dollar (GUSD), which made it to the top 50 of the world’s largest cryptocurrencies.
The most popular of them is Tether. In simple terms, it is a coin that mirrors the US dollar, with the 1:1 price ratio. Despite all the hoopla in the media about coin’s centralised nature and price fluctuation (as of writing, it is priced at $1,01, but not $1), Tether has worked rather well so far. Today, according to CoinMarketCap, it is ranked 8 in the top list of crypto.