What Are Stablecoins Used For And Types of Stablecoin [2022]

What are Stablecoins and What are Stablecoins used for are part of the terminologies and things you need to know in Cryptocurrency as a crypto trader.

If you’re a beginner in crypto or looking to invest in cryptocurrency as a beginner, then you should understand how stablecoins works before investing.

Stablecoins are becoming the newest hot spots on the crypto market. They provide and enhance the efficiency of the provision of financial services including payments and promote financial inclusion. 

Stable coins offer a new way to transact, retain value, and start to redefine modern finance. Their incredible growth in 2020 and 2021 under the DeFi market influence has been interesting.

Stablecoins however bear several risks that could harm. Do not be swayed by the name “stable”, there are systemic risks when stable coins are being used all over the world. 

What are stablecoins used for and Types of stablecoin

In the world of Cryptocurrency, Stablecoins cannot be neglected. The fact is, stable coins can be used to pair or trade along with all other coins.

If you’re asking What are Stablecoins used for, or What are Stablecoins in Crypto? just note that they’re been traded along with other coins as pair.

Many beginners on crypto, who are looking for How to make money with stablecoins, don’t know about this and they’ve been searching and asking questions like;

  • What are examples of stablecoins?
  • Can you make money on Stablecoins?
  • What is the best Stablecoin?
  • List of Stablecoins 2022?
  • How to buy Stablecoin?
  • What are Stablecoins used for?
  • Types of stablecoin?

These are few of the questions people frequently ask that we gathered from the recent search queries on Google.

If you’re also asking any of these same questions and looking for answers, then you’re in the right place.

Here on this page, I will provide you with the possible answers to all these questions, and you get to know everything about Stable Coins.

Let’s quickly see What are Stablecoins, types of Stablecoins and What Stablecoins are used for.

What are StableCoins?

Stablecoins are a type of cryptocurrencies that are pegged to or backed by the underlying real-world assets, ranging from fiat money, commodities, or even another cryptocurrency. 

They are designed to mirror the price of a regular fiat currency, usually the US dollars. As their name suggests, stablecoins are designed to have value that stays (rather) stable with traditional currencies or the underlying commodities.

Stablecoins are pegged at a 1:1 ratio which can be traded on exchanges across the world.

Created to overcome the price volatility of cryptocurrencies such as Bitcoin or Binance, they stem from the fact that there is no robust mechanism to determine their real-world value. 

There are high levels of distrust in cryptocurrencies, investors prefer to resort to safer options like stablecoins. Stable coins make it possible to cash out without actually having to convert your cryptocurrency into fiat. 

These may leverage the benefits of cryptocurrencies and blockchain without losing the guarantees of trust and stability that come with using fiat currencies.

Currently, there are more than 200 stablecoins.

Types of Stablecoin

Stable coins are split into 3 major types based on the design (coin backing), fiat-backed, crypto-backed, and algorithmic.

1. Fiat-backed

Fiat-backed are probably the simplest and most common type of stable coin. They are pegged to fiat currencies like the US dollar or the Euro and usually collateralized at a 1:1 ratio.

This means that for each such stablecoin in existence, there is a fiat currency in a bank account. People can exchange their stable coins and redeem a fiat currency directly from the exchange at any time. 

They rely on the issuing companies to mint or burn them depending on the crypto market demand.

The most popular fiat-collateralized stablecoins are Tether (USDT) and USD Coin (USDC).

Fiat-Backed Stablecoins are among the types of stablecoin that has more popular use and accepted globally when trading.

2. Crypto backed

On the other hand, crypto backed stable coins have automatic and incentive-based systems that allow them to mint and burn tokens to meet demand.

Crypto backed stablecoin are pegged to other cryptocurrencies as collateral. And because the crypto values themselves are not stable, these stablecoins need to use a set of protocols to ensure that the price of the stablecoin issued remains at $1. 

They are often collateralized by a diversified reserve of cryptocurrencies that can sustain shocks and yet remain stable.

A mechanism also employed involves over-collateralization, which means for a crypto-backed stablecoin that is pegged 1:2, for each stablecoin, cryptocurrency worth twice the value of stablecoins will be held in reserve. 

These crypto-backed stablecoins are much more transparent than fiat backed stable coins, having open source codes, and can be operated in a decentralized manner.

Although, they are also more complex to understand, and therefore lack popularity. The most popular crypto-backed stablecoin is Dai created by MakerDAO, whose face value is pegged to the US dollar, but is collateralized by Ethereum.

3. Algorithmic Stablecoins

The last class is so-called algorithmic stablecoins, having a very different design as it is not backed by any collateral. It operates in the way fiat currencies work, in that it is governed by a sovereign such as a country’s Central Bank. 

Given the evident difficulties these stablecoins have at maintaining value stability, their usefulness is limited to total supply manipulations to maintain a peg for algorithmic stablecoins.

The basic mechanism is creating a new coin, setting a peg, and then monitoring the price on the exchange. This can be done algorithmically, in a decentralized way, with open source code that is visible and auditable by everyone.

They may be rebased or coupon-based coins.  Examples include Ampleforth (AMPL), Empty Set Dollar (ESD), and Dynamic Set Dollar (DSD).

So, algorithmic stablecoins are another types of stablecoin you should know when looking for how to make money with stablecoins.

How do Stablecoins Work?

If you’re looking forward to know What are Stablecoins used for or How do Stablecoins work, then this is the time.

Some central stablecoins, such as Tether, require a custodian to regulate the currency and then hold a certain amount of collateral.

Tether holds the US dollar in a bank account. The amount held must be equal (1:1) to what is issued in order to maintain the order of the system. 

This method prevents price fluctuations. However, there are other stable decentralized cryptocurrencies, such as the crypto-backed stablecoin (Dai), that achieve this goal without a central authority figure.

They use smart contracts on the Ethereum blockchain to manage the collateral and maintain order. 

Stablecoins automatically adjust the number of tokens in circulation to keep the price stable.

This means that the value of stable coins should (in theory) not fluctuate frequently, as in normal crypto assets.

Hence, this is how stablecoins work generally.

What Are Stablecoins Used For?

Stablecoins are used in the crypto market for several reasons. 

  1. Stablecoins are used for turning profit into stable coins in short term.
  2. Stable coins are used to avoid the fees and processes of turning profits into fiat money.
  3. Used to invest in cryptocurrency exchanges or decentralized finance (DEFI) applications to return interest and yield.
  4. Stablecoins are used to guarantee safer and attractive investment returns.
  5. They’re used to empower more people to harness the benefits of the blockchain without the risk of large market fluctuations.

In the event of a local fiat currency crashing, people can easily exchange their savings with US dollar-backed or Euro-backed, or even gold-backed stablecoins, thereby preventing the further depreciation of their savings.

So, these are some of the uses of stablecoins you need to know when asking What are Stablecoins used for.

However, with these you can easily learn how to make money with stablecoins as a beginner.

Where are Stablecoins Used?

With the growing number of stablecoins, the use cases keep growing.

Allow the use of Smart Contracts

Stablecoins allow for the use of smart financial contracts that are enforceable over time.

These are self-executing contracts that exist on a blockchain network and do not require any third party or central authority’s involvement.

These automatic transactions are traceable, transparent, and irreversible, making them an ideal tool for salary/loan payments, rent payments, and subscriptions.

Switch Between Volatile Cryptocurrencies and Stablecoins

Stablecoins are most popularly used to quickly switch between a volatile cryptocurrency and a stablecoin, while trading, to protect the value of holdings.

They provide traders with a ‘safe harbour’, which allows them to reduce their risk to crypto-assets without the need to leave the crypto ecosystem.

Payments

Stablecoins allow players to get as close to the benefits of cash as possible. Stablecoins are freely transferable just like cash; anyone on the blockchain network can receive and send coins.

The coins are structured as bearer instruments, giving the holder the right to redeem the coins for US dollars at any time.

This is especially relevant in the decentralized finance (DeFi) segment, where stablecoins play an important role to enable the ecosystem.

Mainstream applications with stablecoins are also picking up in cross-border payments, where they are being used to facilitate cross-border trade and remittances.

Mainstream Commerce

Because these stablecoins are seen as relatively less volatile compared to other cryptocurrencies like Bitcoin and Ether, the idea is that stablecoins might be more widely accepted in mainstream commerce.

Consumers, businesses, and merchants would therefore be more comfortable with using stablecoins as true units of exchange.

How Safe are Stablecoins

While looking for What are stablecoins used for, you need to be sure of How Safe are Stablecoins.

Stablecoins have the potential to enhance the efficiency of the provision of financial services, they may also generate risks to financial stability, particularly if they are adopted at a significant scale. 

Stablecoins are riskier than they may seem. Stablecoins may bear risks in terms of collateral, asset contagion, and accountability.

Do not also ignore the risks that stablecoins potentially pose to the financial system in terms of systemic risks thereby undermining sovereign currencies as may be experienced in a bank run.

These are risks of Stablecoins you should know as a beginner crypto trader.

Frequently Asked Questions

Q1: What are Examples of Stablecoins?

Examples of Stablecoins includes;

  • Tether (USDT)
  • USD Coin (USDC)
  • Binance USD (BUSD)
  • Dai (DAI)
  • TerraUSD (UST)
  • TrueUSD (TUSD)
  • Pax Dollar. etc.

Q2: What is the Best Stablecoin?

The Best Stablecoin is the Tether (USDT).

USDT is the largest and most popular stablecoin, which has been generally proven to maintain its peg to the dollar.

Q3: What are the types of Stablecoin?

There are 4 types of stablecoins, which includes;

  • Fiat-backed Stablecoin.
  • Crypto-backed Stablecoin.
  • Commodity-backed Stablecoin.
  • Algorithmic Stablecoins.

Q4: What are Stablecoins Used For?

Stablecoins are used in the crypto market in the following different ways;

  • Stablecoins are used for turning profit into stable coins in short term.
  • Stable coins are used to avoid the fees and processes of turning profits into fiat money.
  • Used to invest in cryptocurrency exchanges or decentralized finance (DEFI) applications to return interest and yield.
  • Stablecoins are used to guarantee safer and attractive investment returns.
  • They’re used to empower more people to harness the benefits of the blockchain without the risk of large market fluctuations.

Q5: Can You make Money on Stablecoins?

Yes! You can make money on Stablecoins and also earn interest on Stablecoins through trading, investing, hodling, buying and selling of coins.

You can also make money on Stablecoins by trading your coins and converting your coins to Stablecoins like USDT.

Conclusion:

So, this is all you need to know about Stablecoins, Types of Stablecoin and What Stablecoins are Used for.

If you’re still asking What are Stablecoins used for or you’re looking for how to make money with stablecoins, then the above points will help you anytime, any day.

For Beginners in Cryptocurrency, take advantage of this guide today and learn about the stablecoins so you don’t loose money while trading your coins.

However, you can also trade your coins and as well trade gift cards for cash and get paid in naira here on ApexPay.

Happy Trading!

 

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