What Is The Purpose of a Stablecoin?

A Stablecoin is a cryptocurrency that is being pegged to a fiat currency or another stable asset. Stablecoins allow cryptocurrency investors to access the benefits of a fiat currency with a stable economy without actually purchasing the coin. Stablecoins include Tether USD (USDT), USD coin (USDC), Gemini dollar, etc.

The most recent estimate of the number of available Stablecoins places them at over 190 coins.

What is the Purpose of Stablecoins?

Stablecoins are the safest way to store assets in cryptocurrency. Because these coins are tethered to commodities and first currencies. Their values do not succumb to the usual volatility of cryptocurrency assets. They act as a safety net for investors to fall back on when they have purchased cryptocurrency.

They provide the investors with assurance that a stable way to store cryptocurrency assets exists. The basic currency that these Stablecoins are attached to is known as collateral.

How does a Stablecoin work?

Unlike a forex market where you use one currency to purchase another, the cryptocurrency market is different. When you buy a Stablecoin, the company backing it has to manufacture the mint currency. And when you sell, they have to burn the amount of the Stablecoin you sell from their server.

Although Stablecoins are assets available to people trading decentralized coins, they cannot be decentralized as well. This is because their supply must be managed at all costs to prevent abnormal price fluctuations. Due to their centralization, Stablecoins are constantly subjected to audits and checks to ensure transparency.

The Most Common Stablecoins

When talking about Stablecoins, some are used more than others. These Stablecoins include:

  • Tether USD (USDT)

USDT is the most widely used member of the Stablecoin market. Tether USD is backed up by the US dollar and its prices fluctuate according to dollar movements. With the highest trading volume of any Stablecoin in the market, as well a value of almost 1 USD per coin, USDT dominates the cryptocurrency market as both the most highly traded and the most highly staked Stablecoin.

  • DAI (MakerDAO)

As far as unique Stablecoins go, MakerDAO is one of the most peculiar. With a value of $1 per DAO token, Maker DAO is not connected to the USD. Rather, the value of the coin as a Stablecoin is preserved by a selection of cryptocurrencies.

DAO is a Stablecoin that was manufactured as a result of fears developed from Tether USD’s lack of transparency. With USDT withholding information on their reserve assets, DAO was made.

  • USDC (USD Coin)

USD Coin is the second most popular Stablecoin. Although its value is not as close to that of the USDT, it is also popular. It is an Ethereum based Stablecoin based on the value of the US dollar. With regular audits done as well as transparency of the coin, USDC continues to gain popularity.

The single purpose of a Stablecoin in the crypto market is to provide market stability for investors and give them a safe, non-volatile means to preserve their coins. To ensure that investors are always at ease, most Stablecoins tend to get their assets audited regularly by third-party organizations. They are still subject to the normal tax and finance laws of the currency they are tethered to.

For more information, see OSOM Insights.