Since the prices of stablecoins are tied to a reserve asset like the US dollar or gold, they serve as a bridge between the worlds of cryptocurrencies and conventional fiat money.
Compared to Bitcoin, this significantly lowers volatility and produces a digital currency more suited for everything from daily commerce to conducting payments between exchanges.
Here’s how stablecoins work and how they differ from fiat currencies.
What is a stablecoin?
A stablecoin is a cryptocurrency with a fixed price. That might not sound very interesting. However, what if we told you that an important feature of a stablecoin is the way it is backed? The use of fiat currency guarantees the price stability of a stablecoin at all times, which means that its value can never diminish or increase to the physical money it represents (and vice versa).
This unique feature allows the exchange rate between a stablecoin and fiat currency to remain constant while minimizing the cost associated with converting cryptocurrency into fiat currency and vice versa.
The idea of combining the stability of traditional assets with the flexibility of digital assets has proven to be extremely appealing. The value of stablecoins like USD Coin(USDC) as a means of storing and exchanging assets in the crypto space have grown into billions of dollars.
Why Stablecoins Are Important ?
For instance, the USDC stablecoin is backed by assets denominated in dollars that have at least equal, fair market value to the USDC and are held in segregated accounts with US-licensed financial institutions. These accounts are publicly verified and attested to by a reputable independent accounting company.
The Ethereum blockchain is now used by USDC, along with many other stablecoins. Stablecoins inherit some of the most potent characteristics of non-pegged cryptocurrencies but are free from their volatility.
Some of these characteristics are:
- Anyone can use stablecoins on the internet, anywhere in the world, anytime.
- They communicate quickly, inexpensively, and securely.
- They can be programmed and are digitally native to the Internet.
Stablecoins, USDC, and USDT
Both USDC and USDT are stablecoins that are leased. They are nothing more than cryptocurrencies that are tied to the US dollar, a fiat currency.
Although several stablecoins are available on the market, USDC and USDT have the biggest trading volume. But in terms of functioning, while being supported by various businesses, they are all essentially the same.
The abbreviation USDT, or “Tether,” stands for US Dollar Tether. In 2014, Tether Limited, a Hong Kong-based corporation, launched its first stablecoin. In addition to offering great liquidity and, on paper, minimal volatility, it helped close the gap between cryptocurrencies and cash.
USDC, on the other hand, is a similar stablecoin and costs $1. In 2018, it was originally developed by Coinbase and Circle. Compared to USDT, USDC is thought to have stronger governance. The Centre consortium oversees it. Circle formed Centre, and Bitmain and Coinbase are represented on its board of directors.
Stablecoin vs Fiat
National governments are the ones who issue fiat money. They lack asset backing. Their value is determined by the nation’s government and central bank. By manufacturing new banknotes and removing old ones from circulation, the central bank can control the quantity of currency in use.
The fiat money of a country that no longer exists, as the USSR did a few decades ago, is just a piece of worthless paper because there is no longer a government to back it. Although widely recognized, fiat money is susceptible to inflation and may swiftly lose value.
Crypto firms, on the other hand, are the ones that issue stablecoins. More traditional finance investment instruments sponsor these digital assets. They can be linked to fiat money, commodities traded on foreign exchange markets, or precious or industrial metals.
The companies must deposit a comparable amount of fiat money, such as US dollars, into bank accounts before issuing these cryptocurrencies. Some stablecoins serve as collateral for other cryptocurrencies. Non-collateralized stablecoins use an algorithmically driven strategy for managing the stablecoin supply.
Investing in Stablecoins
The financial instrument’s profitability is the next topic of interest to owners of assets. Lending your stablecoin holdings to the platforms providing these services might be highly rewarding. High-yield savings accounts pay far less for storing your fiat currency than the APY of 5% to 25%.
For a platform like Heru, you are presented with several expert-curated collections of tokens and investment baskets.
To get started,
- Visit the website, https://heru.finance
- Register with your email and name
- Complete the required KYC
- Chose an investment basket that suits your risk/reward parameters
- Send funds from the available payment options listed on the platform
- You can track your investments and monitor their growth over time
Most cryptocurrencies lack the stability necessary to be used as genuine money; however, stablecoins make up for some of this deficiency. However, users who use stablecoins should be aware of the hazards involved. While stablecoins may appear to have minimal risks, they might become the riskiest during times of crisis, when it should be the safest to own them.