What do you need to know about stablecoins? It is enough to read this article

Editor's Note: This article comes fromMengyan Finance (ID: Meng-eyes), reprinted by Odaily with authorization.

Mengyan Finance (ID: Meng-eyes)

What are stablecoins?

, reprinted by Odaily with authorization.

Stablecoins have gained more traction in the cryptocurrency space, especially spurred by the digital asset's price slump following the 2017 bull run. This plunge has led to a fundamental shift in the mindset of investors, who are looking for more stable cryptocurrencies.

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What are stablecoins?"In the simplest sense, a stablecoin is a form of digital currency that provides price stability by being backed by reserve assets."There are several reasons why the market is so unpredictable. Chief among these is market size. Despite the media attention, the market for cryptocurrencies is still small compared to established markets such as the U.S. stock market or the gold market. For cryptocurrencies, a small movement of funds may have a ripple effect on the market. Furthermore, blockchain is still an emerging technology with room to grow. Many companies have already started adopting this technology, but it will still take some time to mature.

So, while it has proven itself to be a store of wealth, frequent price crashes, like

crypto winter

As witnessed, there will always be an impact on its status as an investment vehicle.

Demand for Stablecoins

1) Reduce volatility: This is the most pressing need for stablecoins. Traditional cryptocurrencies are highly volatile, and investors who want to participate in the market need assets that guarantee at least a fair degree of stability. Improved stability also aids in market forecasting and institutional investment.

2) Adoption of cryptocurrencies: Highly volatile digital assets are hard sells for both retail and institutional investors. Their volatility hinders adoption by businesses and payment methods. But stablecoins could speed that up, attracting more investment into the cryptocurrency space. Additionally, users can convert many stablecoins to traditional cryptocurrencies. For example, the trading pair BTC/USDT.

3) Hedging: Due to the stability of stablecoins, stablecoins provide investors with the option of hedging the uncertainty of their wealth. Even citizens of highly inflationary economies can use stablecoins to protect their wealth.

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Advantages of Stablecoins

3) Contributes to cryptocurrency adoption

Types of Stablecoins

4) Suitable for different investors regardless of their risk profile.

5) The addition of smart contracts helps to protect all parties in the transaction.

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Types of Stablecoins

Stablecoins work in different ways. How they are set up also determines their characteristics. The current stablecoins mainly include the following types:

1) Stablecoins collateralized by fiat currency

The tokens in circulation are also audited to prevent the issuing company from issuing more tokens than the cash reserves.

advantage

• Stablize

• Examples of fiat-collateralized stablecoins include Tether and TrueUSD.

shortcoming

• advantage
• Stablize

The structure is simple and easy to understand

shortcoming

Users need to trust a central entity, negating a key tenet of decentralization.

advantage

• 2) Crypto-collateralized stablecoins
  

• Crypto-collateralized stablecoins are backed by cryptocurrencies rather than fiat currency pegs. However, since the extended market volatility of cryptocurrencies is greater than that of fiat currencies, crypto-collateralized stablecoins typically require a token-to-reserve ratio of more than 1:1, or “overcollateralization.”

• advantage

shortcoming

• Decentralized, in line with the principles of cryptocurrency.
• Through over-collateralization, it can be used to create leverage for transactions.

Public chain, transparent transactions.

Being backed by a cryptocurrency increases volatility

advantage

• The structure is more complex and difficult to understand
• 3) Unsecured Stablecoins
• advantage

shortcoming

• The value is adjusted according to the forces of the market, so it is quite stable.

Tokens are algorithmically minted or burned, so no collateral is required.