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What is Stablecoin: Definition, Types, and Safety
Get valuable information about stablecoins, how they work, and how the government regulates them. Find the answer which is the safe and best stablecoin of 2023.
Written byAlex Crypto
June 2, 2023
Times are changing, and crypto has already become one of the major currencies in the world. But still, there are lots of newbies who are stuck on the question of what is a stablecoin and how to select the best type. To make that process easier you need to start with the stablecoin definition learning and analyzing its different types. So stablecoin is a cryptocurrency with a value that is pegged to a reference asset. Security, stability, and transparency are the main advantages of this currency. More details about this currency and the best crypto stablecoin you will find below.
Why are Stablecoins so important?
Before finding where to buy stablecoin it's essential to understand its importance. Sure one of the main reasons is that this currency provides a medium of exchange, and as a result in the major centralized crypto exchanges over 80% of the whole trade volume involves the USD stablecoin or its other types.
When reading the stablecoin list you can find out that this is a global medium of exchange that can be used by those who do not trust the centralized forms.
The Stablecoins types
There are a few types of stablecoins based on the method of their stabilization and before selecting the investment tools you need to understand that that is their main difference. Below you can read about the fiat-backed, crypto-backed, and algorithmic stablecoins, and their pros and cons. Based on this information you can assess the attractiveness of each of them and choose for yourself the best option.
This type of coin is one of the key types of digital currencies that use fiat currency (namely its financial reserves) as collateral. Since fiat currency is held in banks and other similar regulated institutions, stablecoins reserves are also held there. One such currency is the USDC stablecoin, which is backed by the dollar. Here are its main benefits:
- simple structure;
- low volatility because of the stability of the fiat currency;
- It was created by Circle Internet Financial.
Its main con is that there is room for hacks or even bankruptcy, and investors should do an audit and remember about the stablecoin regulation US.
If USDF stablecoin and other fiat-backed coins are not interesting to you, then learn about the crypto-backed options. Such coins will be blacked by another crypto so they also be prone to increased volatility and overcollateralized. For example, if the crypto value will be $2 million then $1 million of them will be saved as the reserve for the stablecoins which were backed by it. Because of such characteristics there are next benefits can be found:
- this stablecoin is based on blockchain;
- the custodian will not be required;
- you don’t have to worry about audits or any regulations.
At the same time remember that this decentralized currency has quite a complex structure, and there is a high dependency on the crypto by which it was collateralized.
One of the less popular algorithmic stablecoin is fundamentally different from other stablecoins. There may or may not be reserve assets held. So for the value keeping here will be used the unique algorithmic (computer program) which will run the present formula. At some point that is the same strategy as the central banks use, but there is no monetary policy publicly with simple and understandable parameters. So during the crisis, there will be no credibility of that policy.
- Here are some benefits of this type:
- price of the commodities will be stable;
- each coin will be backed by real assets;
- bigger volume of liquidity on the market.
But before selecting this coin remember the risks that also can be here due to the centralization status.
Regulation or Stablecoins and How They Work
Now you know how does a stablecoin work it will be easier for you to understand its regulation. And the most important thing to say is that there is still a lot of attention focused on stablecoins. As a result of that coins are under scrutiny by regulators and that won’t change in the nearest future.
One of the main reasons for such a tendency is that the crypto market is growing so fast and now it is valued at $130 billion. Only a few years ago there were statements about the necessity of regulating the stablecoin market, similar to payment systems and clearinghouses. And today we have lots of rules, mainly which are based on the focus on the stablecoin because regulators are sure that ust stablecoin and others can really disrupt payment transactions.
What is the purpose of Stablecoin - what are the key problems it can solve
So what is the purpose of a stablecoin? It was created to provide an alternative to such TOP cryptocurrencies as BTC which has a high volatility. For sure because of that the classic crypto might be not the same suitable for common transactions, but this does not prevent the growth of popularity of stablecoins. Here are only some key problems that can be solved by the stablecoins:
- international transactions without the need to have multiple bank accounts;
- any true peer-to-peer digital transfers can be made without third-party;
- with the stablecoin Innovation and protection act this currency can cut down any fees and minimize the processing time;
- stablecoins help to solve the potential privacy infringement.
Based on this information you can make conclusions about excellent growth prospects for stablecoin which can become the universal currency for international transactions.
What is the Best Stablecoin in 2023?
To find the best stablecoin you need to analyze the statistics and learn more about each modern coin. But for sure even before that, you can be sure that Tether (USDT) is the NO.1 stablecoin in the world. It is backed by the fiat currency (gold reserves) and pegged to the dollar at 1:1. If you will check the TOP-5 cryptocurrency it will be there. One more reason to be sure that Tether is the NO.1 is that it can be found on all major exchanges (including Binance and Kraken).
But for sure that information can be not enough to make the right decision. That is why you need to select the type of stablecoin first, and only after that try to find the best coin for yourself. And among the three main types, the fiat-backed currency is the most popular mostly because of its stability and that it is pegged to the US dollar.
One more thing to check before selecting the coin is if you can buy it on the major exchanges and how to buy stablecoin there. That is important because if for you it will be difficult to purchase the stablecoin then what’s the reason for selecting it?
Are Stablecoins Safe?
The question about safety is the same as is USDT a stablecoin. And it should be noted that stablecoins are much safer than the classic cryptocurrency because they (fiat-backed) are pegged to stable assets such as the dollar or gold reserves.
As a result, it is much easier to ensure a stable value and minimize the volatility of their price which is a common problem in the crypto market. If we talk about the cryptocurrency stablecoin, it should be understood that it has the same problems as the classic cryptocurrencies, such as sharp price fluctuations and value, which is not tied to anything.
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