Stablecoins have become increasingly popular in the cryptocurrency world to provide an alternative to the high volatility of other major cryptocurrencies. With their value pegged to another currency, commodity, or financial instrument, stablecoins offer traders and consumers alike a more secure way of transacting with digital assets. Moreover, they can be staked for rewards that range from interest payments to voting rights on certain blockchain networks—making them attractive investments and speculative tools. Here is everything you need to know about stablecoins.
Types of Stablecoins
There are 3 main types of stablecoins: fiat-backed stablecoins, crypto-collateralized stablecoins, and non-collateralized algorithmic stablecoins.
1. Fiat-backed
Fiat-backed stablecoins are types of cryptocurrencies whose value is linked to the value of a government-issued currency like the US dollar or Euro. People can buy these coins and use them for transactions. The value of fiat-backed stablecoins is maintained by holding the same amount of cash as what is represented in coins issued. For example, if a currency has $1 million worth of coins, it must maintain $1 million of actual reserve money. There are several fiat-backed stablecoins available on the market today, for example, Tether (USDT), Binance USD (BUSD), and USD Coin (USDC).
2. Algorithmic
Algorithmic stablecoins are a type of cryptocurrency whose value is linked to a computer algorithm. The algorithm ensures the amount of money in circulation matches its demand, meaning its value does not change much. People can buy these coins and use them for transactions. There are several algorithmic stablecoins available on the market today, for example, Dai (DAI), Frax (FXS), and Basis (BAS).
3. Crypto-collateralized
Crypto-collateralized stablecoins are types of cryptocurrencies whose value is linked to other cryptocurrencies such as Bitcoin or Ethereum. People buy these coins and use them for transactions. The value of these coins is maintained by locking up a certain amount of cryptocurrency in reserve. For example, if a currency has $1 million worth of coins, it must maintain $1 million worth of Bitcoin or Ethereum locked up as collateral. There are several crypto-collateralized stablecoins available on the market today, for example, Synthetix (SNX) and Wrapped BTC (WBTC).
How to stake Stablecoins
Staking stablecoins is a great way to increase your portfolio’s value with reduced risk exposure. To stake stablecoins, you need to deposit them into a wallet or exchange that supports staking. Depending on the cryptocurrency network, you may be able to stake directly from the wallet without moving the coins or tokens. Staking rewards vary depending on the network and the amount of money locked up, so be sure to research each platform before committing any funds. Once you’ve chosen a platform, you can deposit your coins or tokens into their wallet and earn rewards.
Also Read:
- USDC vs Tether: How Do They Differ?
- Largest stablecoin Tether (USDT) briefly depegs as market plummets
- Chinese firm launches stablecoin and CBDC payments system
- Japan’s new stablecoin regulation will take effect in June
- United Arab Emirates will launch a stablecoin for payments
- Australia’s NAB mints AUDN stablecoin
Staking on Binance
Let’s take Binance, for example. To stake stablecoins on the world’s largest crypto exchange, users first need to create an account with Binance if they do not already have one. Once the account has been created and verified, users should deposit the stablecoin of their choice into their wallet on the exchange. After that, users should select the “Stake” option and enter the amount they want to stake. Finally, users can review transaction details and confirm their staking order. Once this is done, Binance will begin crediting rewards directly into the user’s wallet through additional coins or tokens. Generally, these rewards are paid out in the same currency that was staked.
Advantages of Stablecoins
1. Stablecoins are less volatile than traditional cryptocurrencies, making them ideal for buying, selling, and trading goods and services. This stability reduces the risk of market fluctuations significantly.
2. Stablecoins can be used to hedge against market fluctuations and other uncertainties, allowing people to protect their funds from losses during periods of volatility.
3. Staking stablecoins is a great way for investors to increase the value of their investment while still having access to it, as staking rewards are typically paid out in the same currency that is being staked.
4. Stablecoins are convenient for day-to-day transactions and may be used to purchase products and services made either online or in traditional businesses due to their stability.
Disadvantages of Stablecoins
1. Stablecoins may be subject to government regulations, which could limit the use of these coins in certain countries or jurisdictions.
2. Stablecoins, especially those backed by cryptocurrencies, are vulnerable to price swings if their collateral is volatile.
Bottomline
Stablecoins offer a wide range of advantages, such as stability and the ability to hedge against market fluctuations and be very effective in day-to-day payments. However, it is important to keep in mind that there are also disadvantages associated with stablecoins, such as heightened regulatory scrutiny, especially recently brought on by Terra’s infamous collapse, and their vulnerability when collateralized by volatile cryptocurrencies.
