What is a Stablecoin?

USDT, USDC, HUSD and GUSD all have something in common. They are a class of crypto-asset called Stablecoins. 

Stablecoins are tokens that try to provide price stability and increase the adoption of cryptocurrencies by reducing the speculative nature of cryptocurrencies and are usually backed by a Reserve Asset or a traditional asset class like Gold. They also serve as a reference point for prices and are a popular cryptocurrency pair for traders to enter and exit trades. 

The First Listed Stablecoin 

Tether (USDT) is the first stablecoin that was listed on crypto exchanges in 2014. Launched by Tether Limited Group, Tether pegged its value to the US Dollar and maintains the stability of the token by having one US Dollar for every one USDT that is issued. 

This means that for every 1 USDT that is in the market, Tether Limited has 1 USD in assets to ensure that the value of Tether does not go below the 1:1 ratio that USDT has with the US Dollar 

The First Listed Stablecoin, Tether | www.pixabay.com

Importance of Stablecoins 

USDT is probably the most popular stablecoin in the crypto space. It helps traders to take profit from their trades and hold it in a ‘safe haven’ until they wish to purchase another token.  

For example, if a trader bought ETH at $1,000, and the price goes up to $1,500. The trader has 2 options: 

  1. Sell ETH for another token. Depending on the volatility of the token he sells his ETH for, he might lose his profits or gain more profits. 
  1. Sell ETH for USDT and secure the profit of $500.  

By going with option 2, the trader can convert his 1 ETH into 1,500 USDT which he can then buy other tokens with or even cash out in fiat currency. 

A Safe Haven 

Having a stablecoin not only benefits traders but also helps the unbanked. Unlike banks, crypto exchanges and wallets do not have a minimum balance requirement and do not typically exclude people with difficult financial histories. This means that people who are cash-strapped or in difficult financial situations can still access passive income streams with whatever assets they have on hand at the moment. 

Stablecoins are an ideal asset for this purpose. If you are holding a large portion of your savings in Bitcoin, the volatility in prices can create a lot of uncertainty, and poorer people may not have the luxury of waiting for prices to rise again as they may need to use their savings for emergencies.  

Having the option to hold your crypto as Stablecoins gives you the option to earn interest with crypto savings accounts like Huobi Earn, allowing you to earn income passively, just like a traditional bank but with higher interest.  

Different Types of Cryptocurrencies

Keeping Stablecoins stable 

There are three types of stability mechanisms that are used to provide stability for Stablecoins.  

  1. Fiat/Commodity collateralized 
  1. Crypto collateralized 
  1. Non-collateralized (Seigniorage/Algorithmic style) 

Fiat/Commodity collateralized Stablecoins are backed by off-chain assets like fiat or commodities like physical gold or silver by a centralized body. The collateral usually sits with a bank or custodian in a safe or bank account. Stablecoins are created or minted when collateral is sent to the centralized party, and are destroyed or burnt when the collateral is returned to someone redeeming their stablecoin from the centralized authority.  

Having collateral off-chain means that there are regular audits required to show token holders that the collateral is real. 

Some examples of these Stablecoins are Tether (USDT), PAXOS and BUSD. 

A crypto-collateralized stablecoin is backed by on-chain assets. Collateral is held by a smart contract and is decentralized by nature. This allows users to audit the codes and see the amount of collateral being held. Users are also able to lock up their cryptocurrency as collateral to borrow these Stablecoins. Because crypto collateral is volatile in nature, the supply of stablecoin does not necessarily match the demand. 

Examples of crypto-collateralized Stablecoins are DAI and MakerDAO. 

Non-collateralized Stablecoins, also known as seigniorage Stablecoins, are tokens issued and pegged to the price of another asset by fiat. The price of the stablecoin is then controlled by a supply and demand algorithm that determines how much of the stablecoin to mint or burn in order to keep the price stable, which is in many ways similar to what central banks do to manage the value of their currencies. 

Non-collateralized Stablecoins include Carbon and the now-defunct Basis. 

If you are looking to get some cryptocurrencies, Stablecoins can be a way to start. Huobi Earn allows you to earn up to 6% interest on your idle Stablecoins and up to 20% on other cryptocurrencies. 

Strategy for Stable Coins 

One of the strategies that investors and traders do is to keep their crypto gains in Stablecoins. By doing so, they allow their profits to ‘free-ride’ upwards by earning interest while protecting their capital and enabling them to re-invest that capital into another token or to purchase more cryptocurrencies when a buying opportunity arises. 

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