What is Stablecoin?
Let's find out Stablecoin meaning, definition in crypto, what is Stablecoin, and all other detailed facts.
Stablecoin is a fixed value cryptocurrency that is pegged to a leading fiat currency, such as the U.S. dollar, or to an exchange-traded commodity, such as gold. Since these coins are actually stable, they are a great tool to lower the price volatility of the whole cryptocurrency market.
To provide the same price stability as fiat currencies, stablecoin currencies are backed by an underlying asset, usually the one it digitally reflects. For example, Tether (USDT) stablecoin is backed on a 1:1 basis by the U.S. dollar meaning that 1 USDT equals $1.
The amount of available stablecoins and their value has increased dramatically in recent years. Besides, there is a variety of crypto assets that are pegged to other fiat currencies, such as euros, pounds, etc. There are four main types of stablecoins:
- Non-collateralized stablecoins that use algorithm mechanism and the Seigniorage Shares system to preserve their peg.
- Commodity-collateralized stablecoins, like Tether Gold (XAUT).
- Crypto-collateralized stablecoins, like MakerDAO's Dai token.
- Fiat-collateralized stablecoins, like USDC, USDT, BUSD, etc.
With stablecoins, the possibilities seem to be unlimited. Some projects, such as Diem (previously known as Libra), even tried to allow stablecoins to be used as a type of exchange medium that is backed by a basket of national currencies.
While new stablecoin-focused legislations are always believed to be on the way, authorities around the world continue to tolerate them due to their high compliance with financial regulatory criteria. Stablecoins have certainly served as a model for central bank digital currencies (CBDC), both in terms of inspiration and strategy.
Stablecoins are extremely simple to acquire and can be found on nearly any cryptocurrency market. In a nutshell, they provide much-needed liquidity and a safe haven for crypto investors. Besides, they are an important part of the whole ecosystem of digital assets.