The Complete Guide to Stablecoins: Everything you need to know

Stablecoins are a type of cryptocurrency whose purpose is to track the price of an asset, such as fiat currencies like the dollar and euro, or other tangible assets. Their purpose is to provide stability and certainty in the market. Over the years, stable coins have become one of the main pillars of the industry, so let's take a look at the ins and outs and different approaches to stable coins.

What you need to know about stable coins?

Stablecoins are a type of cryptocurrency that combines the benefits of cryptocurrencies with the price stability of traditional fiat currencies. They track the value of a financial asset, most commonly a fiat currency such as the dollar, but can also track the price of tangible assets such as gold or oil. The main purpose of stablecoins is to bring stability to the highly volatile cryptocurrency market, providing certainty for investors.

One of the most well-known stablecoins is Tether (USDT), which was launched in 2014. Together with other stablecoins such as USD Coin (USDC) and Binance USD (BUSD), it leads the cryptocurrency ecosystem in terms of trading volume. These stablecoins act as digital analogues to fiat currencies, allowing users to store and transfer funds in stable assets without having to convert to fiat money.

There are several main types of stablecoins, each with its own characteristics and risks. Main Types of Stablecoins:

• Centralised Stablecoins: Backed by fiat currencies or other assets outside the blockchain and managed by centralised entities;
• Decentralised cryptocurrency-backed stablecoins: Use cryptocurrencies as collateral and are managed by decentralised Autonomous Organisations (DAOs);
• Algorithmic decentralised decentralised stablecoins: Maintain stability without the use of assets, but through algorithmic management of the coin supply.

Stablecoins have quickly gained popularity due to their ability to avoid the volatility of the cryptocurrency market. They allow investors to use cryptocurrencies safely, minimising the risks of significant price fluctuations. However, it is also important to consider the risks associated with each type of stablecoin, including issues with transparency, centralised management and potential instability.

Different Types of Stablecoins

Stablecoins are cryptocurrencies that provide stability by being tied to assets such as fiat currencies or cryptocurrencies. There are three main categories of stablecoins, each with its own characteristics and risks. Before going into technical details, let's present the main differences between these types

1. Centralised Stablecoins

Centralised steblecoins are backed by fiat currencies, such as the dollar or euro, which are held in the reserves of the issuing company. These steblecoins function through a minting and redemption mechanism: tokens are created when fiat currency is deposited and burned when it is withdrawn. Examples of centralised steblecoins include Tether (USDT), USD Coin (USDC) and Binance USD (BUSD). These steblecoins are easy to use, backed by secure reserves and have a proven track record, but are dependent on centralised companies and subject to regulation.

2. Decentralised Stablecoins

Decentralised stablecoins are backed by other cryptocurrencies and managed by decentralised Autonomous Organisations (DAOs). An example is DAI, which is backed by cryptocurrencies such as Ether and USDC. These stablecoins offer transparency and decentralised management, but their collateral costs can be high and their stability depends on the volatility of cryptocurrencies.

3. Decentralised Algorithmic Stablecoins

Algorithmic steblecoins maintain stability by regulating the supply of tokens through algorithms, without asset collateralisation. The protocols of these steblecoins act like central banks, increasing or decreasing supply depending on market conditions. An example is the decentralised USD (USDD) on the TRON platform. Algorithmic steblecoins are fully decentralised and innovative, but they are complex to set up and are subject to high volatility risks.

Advantages and Disadvantages of Stablecoins

Each type of steblecoin has its own pros and cons:

• Centralised Stablecoins: Easy to use and have reliable reserves, but depend on trust in the management company and may be subject to regulation.
• Decentralised Stablecoins: Transparent and decentralised, but require over-collateralisation, which increases the cost of management.
• Algorithmic Stablecoins: Most decentralised and innovative, but their complexity and risk of instability can lead to significant losses.

Stability of Stablecoins

Stablecoins pegged to the dollar have a theoretical value of $1, but in reality there can be minor fluctuations due to supply and demand. In rare cases, steblecoins can lose their stability, as happened with UST in May 2022, leading to its collapse. Therefore, it is important to choose verified stablecoins and take precautions when using them.

Conclusion

Stablecoins play an important role in the cryptocurrency ecosystem by offering stability and convenience that is not available to other cryptocurrencies. However, each type of stablecoin has its own unique risks and benefits that should be considered when making a choice. In a volatile market, it is important to carefully evaluate the stability and reliability of the chosen stablecoins. Ultimately, choosing a steblecoin wisely can be the key to a successful investment and protecting your assets.