In recent years, stablecoins have caused a commotion in the cryptocurrency market. These tokens offer an option to selling your cryptocurrency and buying dollars because they may be held indefinitely.
Stablecoin: What's the Deal?
Stablecoins are a type of digital currency that aims to be more stable by being pegged to other, more stable assets or fiat currencies, such as the US dollar, gold, or even oil. Stablecoins provide a safe refuge for those who want to keep wealth but are wary of having it fluctuate owing to the high volatility of cryptocurrencies. Their relative stability in value is a positive sign for investors, but it's important to remember that the underlying assets also experience price fluctuations on their own, albeit less dramatically than the wild swings that bitcoin and altcoin traders are used to.
How do stablecoins stay.. stable?
While the specifics of how each stablecoin project operates may vary, many of these digital currencies base their value on the value of traditional assets that have been pledged to support the tokens or coins that are in circulation. The pegged asset itself may at times be one of these assets (such as USD). In other cases, this could refer to more conventional forms of capital investment (similar to how a bank operates).
Some stablecoins, like Maker's DAI, take a more novel tack by providing incentives to network users to keep their token's value relatively stable compared to the US dollar. Many DAI users just use the token without bothering to learn how it functions as a stablecoin. More advanced participants might earn rewards for keeping the peg in place through the use of collateralized debt positions (CDP), in which ether is locked up as collateral for a DAI loan. Several excellent articles explain how DAI keeps its value stable.
What Types of Assets Are Preferred for a Stablecoin?
It's quite improbable that some currencies will ever have stablecoins. For people in some parts of the world, stablecoins provide a route out of the chaos that comes with hyperinflation and other types of economic instability. However, gold's lacklustre performance in the stablecoin market is not surprising given the asset's own speculative and even volatile nature. Large, widely used currencies, including the US dollar, the euro, and the pound, tend to dominate the most popular pools. There is, however, an increasing diversity of this from year to year.
While the notion of a fiat currency as a "stable" or "safe" asset may be laughable to some in the crypto world, for the time being, the stability of these conventional currencies is where many traders find some degree of comfort, and they are great tools for things like remittance, where the volatility of the bitcoin and other cryptocurrency markets can add risk. Stablecoins, at their heart, serve as a link between crypto and fiat money.
A Safe Place to Keep Your Stablecoins
Currently, the most widely used stablecoins are tokens on larger, more established networks like ethereum or, more recently, BNB Smart Chain and Tron. Since this is the case, it is common practise to save such tokens in a wallet that is compatible with both the network and the token in question. MetaMask, MyEtherWallet, and MyCrypto are all excellent choices for securing Ethereum-based ERC-20 tokens like DAI, as are hardware wallets from trusted manufacturers like Trezor and Ledger.
Like we mentioned before, not all stablecoins are backed by national currencies. There are other options, such as the gold-backed stablecoins like the Perth Mint Gold Token (PGMT). The petro - also known as the petromoneda, which was introduced by the government of Venezuela in 2018 is another example, but one that raises a number of ethical questions. The petro was designed to correspond with the country's oil output. Nonetheless, amid widespread international alarm and the imposition of severe penalties, this endeavour appears destined for failure and has likely already been abandoned.
Is there a Downside to Using Stablecoins?
There is one major worry about collateral-backed stablecoins. Your reliance on an external entity for the stability of the stablecoin you own raises some doubts. This was a widespread worry at the outset of the stablecoin phenomenon, and it persists today. However, authorities are getting more involved, so there will be more eyes on this. However, it is important to think about your level of comfort when using a third person in your financial matters.
In a nutshell, stablecoins appear to be a tool that cryptocurrency traders all around the world are warming up to. You can discover a solution that works for you from the many available alternatives. Stablecoins can be a great option if you're seeking for a way to mitigate the high risk associated with the fluctuating value of various cryptocurrencies.
Are there any Australian Dollar Stablecoins?
Yes! AUDD - short for Australian Digital Dollar - is an Australian dollar stablecoin collateralised on a 1:1 basis by Australia’s sovereign currency. This means the risk of the AUDD depreciating in value is minimised.
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This awesome article was inspired by gingerbreadfork on the LocalCoinSwap Academy