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By Noft Games on June 105 min read
Section: Crypto Theory

Stabelcoins - Guide

One of the most famous cryptocurrencies in the world is Bitcoin, which is also famous for going up and down a lot in value. Often by the minute. So the crypto world responded by creating currencies that are more stable, aka stablecoins. 

The name kind of says it all. But what is a stablecoin actually? How is it different from other cryptocurrencies, and why is it so hyped up? The Noft Games team is here to give you a quick dive into stablecoin waters. Let's go! 

What is a Stablecoin  

Stablecoin is a type of cryptocurrency with a value pegged to a real-world stable asset, like gold or any national currency. This essentially means that their price is protected from fluctuating. 

Stablecoins are here to give us the best of two worlds: the stability of fiat in combination with the transaction speed, security, and privacy provided by crypto. 

Stablecoins keep their 1:1 ratio when 1 coin equals 1 US dollar (or 1 ounce of gold if it is gold-pegged). How do they achieve that? Using different approaches. 

Stablecoin Types

Depending on the approach utilized, there are three main types of stablecoins you should be aware of:

- Off-chain collateralized 

- On-chain collateralized 

- Algorithm-backed 

1️⃣  Off-chain collateralizedstablecoins are backed by any physical valuable asset. There are two types of these stablecoins.

a. Fiat-collateralized coins are 100% backed by fiat (most often US dollar), meaning you put in real currencies in exchange for stablecoins. Let’s take a quick look at some of the most prominent examples falling into this category. 

USDT (Tether)

👉 Biggest USD-pegged cryptocurrency by now, dominating the crypto market 

👉 Currently the first most traded cryptocurrency beating Bitcoin, with a 24-hour trading volume of over $45 billion, according to CoinMarketCap.

👉 Available in almost every chain existing  

👉 Backed by bonds and commercial paper, rather than cash

The main concern here is that you might want to sell your USDT and buy dollars when the market crashes. A lot of people will be willing to do the same. However, USDT regulators might not have enough dollars to pay, as cash makes a tiny percent of their reserves.

USDC (USD Coin) 

👉 Owned by Circle Inc. that also owns Coinbase

👉 100% backed by cash

👉 Attested every month, trying to be pretty transparent 

BUSD (Binance USD)

👉Owned by Binance

👉Regulated by NYDFS

👉Fully backed by cash and cash equivalents 

One thing to mention here is that off-chain collateralized stablecoins are usually centralized, which has its own risks. Owners of centralized stablecoins don’t really have full control over their assets because authorities have the ability to freeze operations literally anytime.

b. Commodity-backed crypto is collateralized by tangible interchangeable assets with real value, such as precious metals, diamonds, oil, and real estate. 

Some examples include:   

CACHE (CACHE gold) - gold-backed 

PAXG (PAX) - gold-backed 

PTR (Petro) - backed by oil

2️⃣ On-chain collateralized, or crypto-backed, assets rely on other currencies inside the blockchain. They are supported by multiple crypto assets,  there is no single entity in control of the funds, and this type of stablecoins is considered more decentralized. 

DAI

👉 Owned by MakerDAO

👉 Does not depend on US dollar 

3️⃣ Algorithm-backedstablecoins are pegged to no assets but operated by smart contracts and algorithms that control stablecoin supply. They are considered to be the most decentralized. 

USTC (Terra Classic USD) - former UST

👉 Belongs to Terra Ecosystem 

👉 Keeps its 1:1 ratio using an algorithm that automatically controls stablecoin supply and value based on its demand. 

👉 Successfully deployed the scheme until the recent crash of the Terra ecosystem, when UST lost its peg

👉 Reserve pool contains BTC and LUNA

USDD

👉 Owned by Tron DAO

👉 Launched April this year

👉 Deploys mint-burn mechanism, identical to that by Terra

👉 Has a more robust reserve pool of 10 billion US dollars in BTC and TRX, plus stablecoins like USDT, USDC, DAI, BUSD, TUSD 

What are Stablecoins Used for

Bearing in mind that stablecoins have literally no volatility and make buying other cryptocurrencies easier than ever, they have loads of use cases:

✅ Long-term Holding

Stablecoins help manage liquidity in crypto portfolios without converting assets back to fiat. Moreover, people from all over the world may prefer to storetheir crypto in stablecoins to save their money from inflation happening in their countries.

✅ Trading & Saving

Let’s say you are holding Bitcoin, and you think it is going to go down. You do not want to lose money, so you cash out the stablecoin. Because, well, it is stable. You keep the fund in stablecoins, and when the Bitcoin stabilizes, you buy the dip. 

✅ Transactions. 

Fast processing and low transaction fees make stablecoins a good choice for sending money anywhere in the world. Plus, it is easier to transfer stablecoins between exchanges. For example, USDT exists on every popular blockchain, which makes it highly accessible and usable. 

✅ Staking & Lending

Every stablecoin allows one to earn interest using different strategies. Let’s say you sold something. You decide to put your money in crypto, play safe - you do not want the volatility of Bitcoin, but still, earn interest. You can get it with stablecoins, say, USDC or BUSD, or USDD that promises 30% risk-free yields. 

That wraps up everything about stablecoins. As any other cryptocurrency, each type of stablecoins is fraught with risks. Do your own research, consider what backs each stablecoin, centralization issues, level of transparency, and your way of using crypto. 

What is your opinion on different stablecoins? Which ones do you use daily, and which ones you trust the most? Drop us a comment below 👇

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