What is a stablecoin? Why is it called "stable"?

Stablecoin is a digital asset that can maintain a constant value over time. This type of asset is designed to have a reference value of another asset, for example, a pegged value with the world’s major currencies or a commodity-backed. Value fixation through the use of backed digital assets and computerized coin volume control. As a result, a stablecoin is similar to “money” because it has a store of value. Therefore, a stablecoin is now increasingly used as a medium of payment, which other cryptocurrencies such as bitcoin may not be able to do. because the price fluctuates. That’s why many businesses and companies trade using stablecoin for price stability reasons and to ensure low volatility in the coin price. They fall into three categories:

Stablecoin varieties

1. Stablecoin backed by Fiat Stablecoin

Stablecoin backed by Fiat Stablecoin is a stablecoin with fiat-backed value, which is the most stable. It is quoted in the US dollar or other fiat currencies in a 1:1 ratio.

Examples of coins: are Tether (USDT), USD Coin (USDC), and Indonesia Rupiah Token (IDRT). Regardless of whether it is a company, bank, or government issuing the coin, the same amount should be held in a trusted bank.

2. Stablecoin backed by digital assets Stablecoin

Stablecoin is backed by digital assets stablecoin is a stablecoin with a crypto-based value or crypto-currency collateral. The value is always fixed at 1 to 1 USD.

Coin example: Maker DAO developed a coin called DAI by depositing a certain amount of Ethereum (ETH) into the system. As collateral for borrowing DAI uses the same principle as a stablecoin backed by Fiat, but instead of collateralizing assets with financial institutions. We will use the blockchain system instead of that process.

3. Algorithmic Stablecoin Algorithmic Stablecoin

Algorithmic Stablecoin is a very new stablecoin and is not yet widely used in the market. Generally, this coin is not based on any real asset price but uses blockchain-based algorithms to always determine the value of the coin equal to 1 USD.

For example, Basis is a crypto that uses an algorithm to adjust a coin’s supply to keep the coin’s value constant. And there is also the CarbonUSD coin.

The advantages of stablecoins

Stable, built to fix volatility issues for cryptocurrencies. It is considered a more stable digital currency. As a link between the crypto world and today’s currency world, Stablecoin is ideal for beginner crypto investors because of its low volatility.
Decentralized, which means it is not tied to a particular system or entity. There is no need to go through an intermediary for verification. Because transactions are made through Blockchain technology, which automatically monitors and records transactions. No need to go through an intermediary and save on fees as well.
Verifiable and transparent, blockchain technology will allow anyone to verify the information and make it impossible for anyone to intervene and falsify it. Because if they are to falsify data, they must forge massive amounts of data in sync. which is almost impossible.

Stablecoin Restrictions

Stablecoin is a cryptocurrency that still has an intermediary and relies on third-party scrutinies, such as stablecoin, that ties its value to the current currency, whether it be dollars or gold. Such assets are also controlled by intermediaries and rely on intermediaries to verify and certify the value of the collateral assets.

Stablecoin Advantages

This type of coin is not speculative. It has very low volatility because its value is almost constant. The general idea of stablecoins is to create crypto coins with a constant value, so traders often use stablecoins as a haven during market volatility.

However, when considering the stable value of a particular coin, it is better to study and look at the asset or the value of other assets as closely as possible to the monetary value.

Reference : zipmex