Stablecoins: What Are They and Why Are They So Useful?

If you've already delved a bit into the world of cryptocurrencies, you've likely noticed their most distinctive characteristic: volatility. Prices can rise and fall drastically in a matter of hours. But what if there was a cryptocurrency designed to maintain a constant value? This is where stablecoins come into play.

What Are Stablecoins?

A stablecoin is a type of cryptocurrency whose value is designed to be pegged to a more stable asset, such as a fiat currency (U.S. dollar, Euro), a commodity (gold), or even an algorithm. The main goal is to minimize price volatility, thereby offering greater stability in the volatile cryptocurrency market.

The most popular stablecoins are usually pegged to the U.S. dollar, maintaining a 1:1 ratio. That is, 1 USDT (Tether) or 1 USDC (USD Coin) should be worth approximately 1 dollar.

How Do They Maintain Stability?

There are different mechanisms for a stablecoin to maintain its stable price:

1. Fiat-Collateralized (the most common): These stablecoins are backed by an equivalent amount of fiat currency (dollars, euros, etc.) held in bank reserves. For every stablecoin in circulation, there is one unit of the backing currency held. USDT and USDC are the most well-known examples of this type. Their issuers regularly audit these reserves to ensure that the backing is real and sufficient.

2. Crypto-Collateralized: In this case, the stablecoin is backed by other cryptocurrencies (like Ethereum or Bitcoin), but generally with over-collateralization (e.g., for every dollar of stablecoin, 1.50 dollars in cryptocurrencies are held) to absorb the volatility of the backing asset. DAI is a prominent example.

3. Algorithmic: These stablecoins do not have direct backing in external assets; instead, their stability is maintained through algorithms and smart contracts that adjust the supply and demand of the stablecoin. If the price goes up, the algorithm increases the supply; if it goes down, it reduces it. They are more complex and often carry higher risks.

Why Are Stablecoins So Useful?

Stablecoins have become an indispensable tool in the crypto ecosystem for several reasons:

• Refuge from Volatility: When the cryptocurrency market is highly volatile, investors can quickly convert their crypto assets (like Bitcoin or Ethereum) to stablecoins to protect their capital without having to exit the crypto ecosystem and revert to fiat currency.
• Facilitating Operations and Trading: They allow traders to move between different cryptocurrencies quickly, without going through a bank, and without worrying about price fluctuations between operations.
• Stable Payment Method: They offer a digital payment method that is not subject to the rapid price swings of other cryptocurrencies, making them more practical for everyday transactions.
• Bridge Between Traditional Finance and Crypto: They are an easy entry and exit point from the crypto world, allowing users to quickly convert their Euros to a stablecoin to trade, or vice versa, without the waiting times of traditional bank transfers.
• Access to DeFi Services: They form the basis of many Decentralized Finance (DeFi) protocols, allowing users to earn yields (like interest) on their funds in a stable manner.

At Bitnovo, we understand the importance of stablecoins for your operations. We offer you the possibility to operate with them, providing you with a more secure and stable way to navigate the exciting, yet sometimes turbulent, world of cryptocurrencies.