What is a Stablecoin?
A stablecoin is a type of cryptocurrency that retains a fixed value at all times. Stablecoins are usually backed by an asset reserve to warrant their value such as commodities, fiat, or other cryptocurrencies. Stablecoin prices are not subjected to changes like other cryptocurrencies.
In some cases, stablecoin prices are balanced by using an automated program that controls their total supply. This type of stablecoins is called algorithmic stablecoins. The most important use case of a stablecoin is using it for everyday purchases.
Stablecoins Vs Traditional Currencies
Stablecoins are used as medium of exchange; it means that people can use stablecoin to exchange the value of goods or services. In this manner, investors can covert fiat currencies or cryptocurrencies into stablecoin and purchase or sell goods or services via them.
The backing reserves or the intricate algorithm of a stablecoin ensures that its prices always remain fixed.
The algorithmic stablecoins make use of smart contracts to issue new tokens or send existing supplies to burn addresses as a price-controlling mechanism. In this manner, investors can ensure that the price of the stablecoin that is balanced with the total supply of another token that is subjected to market speculation always remains the same.
At the same time, investors can convert their cryptocurrency reserves into stablecoins as a way to preserve gains or prevent losses.
Since stablecoins retain a fixed value at all times, in this manner, it is possible for investors to use them as a viable medium of exchange. When it comes to using stablecoin as a conventional medium of exchange such as fiat currencies or cryptocurrencies, investors may choose stablecoins on account of the advantages that they offer.
One such benefit is lower transaction costs. The transactions made using stablecoin are made on decentralized networks and therefore they only cost a fraction of fee in comparison to alternatives.
At the same time, stablecoins also allow investors to make faster transactions since there are no centralized points or checks to delay the transaction cycle. Another major advantage of stablecoin transactions is the price stability.
In this manner, stablecoins also serve as an effective hedge against fluctuations and secure the investors from the high price volatility of cryptocurrencies. Additionally, stablecoins are also an effective store of value meaning that investors are preserve profits or prevent value loss by transferring their investments into stablecoins.
One of the most important features of a stablecoin is that it is best instrument for cross-border payments. Using stablecoin investors can make cheap, fast, and hassle-free international payments and settle remittance bills.
However, there are some instances such as TerraUSD and USDT stablecoin that lost their peg as a result of risks and issues related to the balancing structure. Therefore, investors have to account for these sudden changes that result in stablecoin’s value dropping to zero.
How to Store a Stablecoin?
To store a stablecoin, investors need a digital wallet that has the ability to secure them. There are various digital wallet products that allow investors to store stablecoins. If an investor is planning to purchase or sell a stablecoin they have to check if a given wallet offers support for them before creating a new account.
In order to operate a digital wallet the investors need to have a secure and strong internet connection.
The next step is to create an account at a digital project that offers support for the intended stablecoin. In some cases, the custodial services providers require the investors to complete identity verification procedures such as KYC AML, etc.
The investors must also account for the available payment options that allow them to purchase stablecoins or other cryptocurrencies using bank wires, credit cards, debit cards, or neo banks, etc.
Stablecoins are one of the most useful forms of cryptocurrencies. Investors rely on stablecoin for various use cases. Therefore, the demand for reliable stablecoin among cryptocurrency investors is increasing. Cryptocurrency investors may also use stablecoin storage options in the form of browser extensions such as MetaMask.