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Tuesday, November 30, 2021
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What Are Stablecoins And How Do They Work?

One of the most common criticisms about cryptocurrency is that it doesn’t actually exist. What they mean is that since it isn’t staked to anything of value like gold that it’s not real currency and is something of an enigma. 

Though cryptocurrency in general has overcome this perception and is taking on a more mainstream acceptance, there are still some that would prefer something more tangible while also enjoying the benefits of a decentralized currency. Which is where stablecoins come into the picture.

One of the biggest benefits to a stablecoin is that it is staked to something of value like real estate, gold or even another fiat currency.

Of course, there is more to it than that so let’s take a look at what some stablecoins are and what they actually do.

Examples of stablecoins

To get an idea of what a stablecoin is, it helps to have some examples of the actual coins. The most famous of which is certainly Tether. 

Tether is a favorite among people that look to stablecoins as it is tethered, so to speak, to the value of a US dollar. This makes it ideal as a parking area for assets when the market starts to dip or is headed for a crash. Tether, and other stablecoins for that matter, provide a safe haven that won’t crash alongside the stock market since it is still in the cryptocurrency sphere and not an actual fiat.  To get an idea of how stable it is, look no further than the value of USDT to BTC to get an idea. 

Dai is another popular stablecoin but has a major difference from Tether. Rather than tie itself directly to a fiat currency, it is collateralized by another cryptocurrency. It is backed by the US dollar, but it has a backer in Ethereum to provide a sort of insurance or a hedge that Tether doesn’t have.

Then, there is Digix Gold or DGX that is backed up by the value of gold. This is also very popular with the people that are sceptical of a central banking authority and are very much against any type of state authority. People that love to buy up gold as insurance against a market crash often love to buy Digix Gold for its other benefits that don’t come with gold. 

How stablecoins are used

The most common use for a stablecoin is to have a safe haven for their assets as I explained in the last section. Since the coins have collateral in another type of stable asset, they are less likely to be tied to the whims of other, less stable cryptocurrency. Then when the crisis seems to have passed, they can trade it back if they wish.

Another popular use is to make purchases. Though it may seem obvious to use them this way, and you may wonder why buy those rather than another cryptocurrency, they provide another layer of security. For instance, people that are wary of the volatility of Bitcoin may want to use a stablecoin for their purchases for the added stability but also not wish to put themselves at the mercy of a banking institution.

Paul Ebeling
Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.   

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