What Is A Stable Coin?

stable coins

If you, like millions of others around the world have a piqued interest in cryptocurrency and still navigating your way through the terrain, a question that may have come up is, “what is stable coin?”. A stable coin simply put, is a stable token of cryptocurrency which has its value ‘pegged’ to an existing national currency, commodity or cryptocurrency. The creation of a stable coin is based on the idea that we can create a cryptocurrency that is totally reliable, fixed and almost devoid of the hassle related to current banking systems and regulations.

To better understand what a stable coin is, it can be separated into three categories; fiat-backed stable coins, cryptocurrency-back stable coins and non-collateralized stable coins.

 

What Is A Fiat-Backed Stable Coin?

This stable coin is backed by real world currencies like the US Dollar. The value of each stable coin is pit directly against the currency that backs it and therefore has the collateralization ratio of 1:1. For instance, if you have 1 stable coin you should be able to liquidate it for exactly 1 US Dollar. It can be said that the fiat-backed stable coin is more like a digital representation of a US dollar as it is 100% price stable.

The fiat collateral fixed to this type of stable coin allows for a less volatile cryptocurrency which is well suited for everyday global transactions for goods and services. Current examples of this type of stable coin is Tether and True USD.

 

What Is A Cryptocurrency-Backed Stable Coin?

This stable coin operates in much the same way as the fiat-backed stable coin, except that its value is ‘pegged’ against another cryptocurrency like Bitcoin instead of fiat currency. This ultimately means that the entire system of the cryptocurrency-backed stable coin is existent on a blockchain platform which is in turn decentralized. It also means that liquidating your stable coin is much faster and easier than that of fiat-backed stable coins.

The collateralization ratio of this stable coin is quite a bit higher than that of the fiat-backed stable coin, and although that might be the case, it is more transparent and is also price stable. An example of this stable coin is DAI.

 

What Is A Non-Collateralized Stable Coin?

A non-collateralized stable coin aims to maintain price stability without being reliant on any collateral reserves. This means that even if real world currencies were to collapse, its value would remain stable. This is quite an ingenious solution to some of the problems faced by the other stable coins as it is completely autonomous.

The value of this stable coin is based upon supply and demand and is controlled by smart contracts which utilize specific algorithms. These algorithms detect fluctuations within the supply and demand chain for this stable coin and adjust the amount of tokens, or coins, in the market accordingly, which in turn stabilizes the price of the stable coin.

 

So, in a nutshell, what is a stable coin? Stable coins are the reliable future of cryptocurrency with its massive potential to create non-volatile currencies while maintaining fast and efficient global transactions. This exciting evolution, while incredibly exciting, can also be daunting for some.

In helping you understand what a stable coin is, we must let you know that currently we do not offer any stable coin purchases on the site. At CryptoFish, we do however offer a very simple way for you to purchase leading cryptocurrencies like Bitcoin, Ethereum, Litecoin, Bitcoin Cash and Ripple using your debit or credit card online.

 

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