Since their prices linked to a reserve asset like the dollar or gold, stablecoins act as a bridge between the worlds of cryptocurrencies and conventional fiat money. As a result, there is significantly less volatility than there would be with a currency like Bitcoin and resulting digital currency is better suited for everyday transactions and transfers between exchanges. The stablecoins on coinbase like USD Coin (USDC) have grown to some of the most well-liked methods of storing and exchanging value in the cryptocurrency ecosystem.
What is the Stablecoin Process?
The goal of stablecoins is to tether their market value to an outside standard, often a fiat currency. They serve as a better trade medium than more volatile cryptocurrencies. Stablecoins can link to money, such as the dollar, or the cost of a commodity, like gold, or they can utilise an algorithm to regulate supply. Additionally, they keep reserve assets on hand as collateral or by using supply-controlling algorithms with stablecoins on coinbase.
Different Stablecoin Types
Stablecoins come in a wide variety, with the asset that backs them serve as their main point of differentiation. The main types are as follows:
Object-Based Stablecoins
Hard assets like gold or real estate used to stabilise commodity-backed stablecoins. Although many employ various baskets of precious metals, the most popular commodity used to collateralise stablecoins gold.
Fiat Backed Stablecoins
Chinese yuan reserves kept as collateral for stablecoins backed by fiat currencies like that one. Other types of fiat include commodities like corn or oil and precious metals like platinum or silver. The majority of stablecoins with fiat backing backed by dollar reserves. The reserve for the currency managed by a separate custodian, whose performance regularly audited to maintain compliance.
Crypto-Backed Stablecoins
Cryptocurrencies can support one another as well. With cryptocurrency-backed stablecoins, this is the case. The stablecoin maintains collateralised position to offset high relative volatility of backing stablecoins cryptocurrencies. As a result, even if the value of the cryptocurrencies backing the stablecoin drops drastically, it will continue to keep its intended value, which is typical $1.
Siegniorage Style Stablecoins
Rather than another asset or currency, siegniorage is controlled and supported by an algorithm or procedure. Robert Sams, a renowned cryptographer, proposed the idea of a Federal Reserve token that may act as such in a whitepaper that served as the inspiration of siegniorage as a backing. These coins might have an independent “backer” provided by smart contracts running on decentralised networks.
Stablecoins have a variety of uses.
Reduce volatility.
Several times per minute, the value of cryptocurrencies like Bitcoin and Ether changes. The certainty that the value of their tokens won’t surge or fall unexpectedly shortly can provided by an asset is tied to a more stable currency.
Trading or preserving assets.
Stablecoins are simple to transfer and can held without a bank account. The value of stablecoins can be transported easily, especially to locations where it could be challenging to find U.S. dollars or where the local currency is unstable.
Earn interest.
On a stablecoin investment, there are simple ways to make interest payments. Low-cost money transfer. With transfer fees of under $1, users have transmitted up to a million dollars worth of USDC. Send across borders. Stablecoins like USDC are an excellent option for sending money internationally due to their quick processing times and reasonable transaction costs.