Stablecoins are a new type of cryptocurrencies in the market which is pegged to the real-world assets.
The examples of real-world assets are gold, oil, commodities or fiats. This linking or pegging is done in order to keep the price of the stable coins stable as compared to the volatile price of BTC and ETH.
How does Stablecoins work?
Stablecoins also have their own blockchain or cryptographic tokens which is visible to everyone on the blockchain.
Stablecoins get their stability from their linking to real-world assets. Their linking does not mean that they are linked to a bank or a nation-state but their stability depends upon their own cryptograph. It also depends on the stringent audits to ensure that the underlying asset is present. These assets are owned by a central entity which ensures that the value and usage of the assets is maintained.
Properties of Stablecoins
The main purpose of Stablecoins is to become a digital firm of cash with stable value. In order to become stable, it has to have the properties of sound money. Some of the major requirements for a cryptocurrency to become stable are:
- Store of Value
- Unit of Account
- Easily divisible and transferable
- Used as a medium of exchange
Types of Stablecoins
There are mainly three different types of Stablecoins
- Crypto collateralized: These Stablecoins are backed up by another cryptocurrency rather than a real-world asset.
- Fiat collateralized: These Stablecoins are backed by real-world assets and these assets are owned by a central entity.
- Non-collateralized: These Stablecoins are not backed up by any asset but instead maintains its value by people expecting it to remain at a stable value. It is also known as Seigniorage coins and uses the same method where smart contracts are used to maintain the value of the coin.
What is the use and importance of Stablecoins?
The main use of Stablecoins is to use it as a medium of exchange whose value remains stable and not fluctuating like other cryptocurrencies like Bitcoins, Ethereum etc.
It should be stable like other currencies such as US dollars, GBP etc. Stablecoins fulfill the store of value concept.