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What is Stable Coin

Updated on :  

08 min read.

Apart from Bitcoin and altcoins, there is another form of cryptocurrency that you can invest in. This crypto asset is called stablecoin. These coins provide a suitable alternative to other popular cryptocurrencies, their volatility and other related issues. 

 To know more on this matter, read on.

What are stablecoins?

Stablecoins are crypto coins whose value is pegged to fiat currencies, financial instruments or other commodities. They do not face the high volatility of regular cryptocurrencies and serve as a more useful medium of exchange. These crypto coins pursue price stability by maintaining reserve assets. They achieve this by keeping collateral or via algorithmic formulas that control supply.

Categories of stablecoins

Here are the different types of stablecoins you will find in the crypto space:

Crypto-collateralised stablecoins

These types of stablecoins are backed by other cryptocurrencies. As cryptocurrencies are volatile, a stablecoin backed by crypto assets is always over-collateralised. This way, the value of the crypto assets in reserve always stays higher than the stablecoin itself. 

For example:

The stablecoin DAI is pegged to the US dollar. However, it is still backed by Ether and other cryptos worth 150% of the DAI in circulation.   

 Algorithmic stablecoins

Algorithmic stablecoins maintain their values through an algorithm that controls their supply. This mode of operation is not so different from central banks, which do not keep any reserve assets to maintain their currency value. 

The algorithm of this type of stablecoin aims to incentivise market participant behaviour to manipulate the circulating supply. They aim to stabilise the price in this manner. TerraUSD is a good example. 

Fiat-collateralised stablecoins

This stablecoin maintains its value by having fiat currency as its collateral. Apart from currency, the value can also be pegged to precious metals like gold and silver or commodities like crude oil. Most stablecoins have US dollars as their collateral. TrueUSD (TUSD) and Tether (USDT) are two popular examples.

How to buy stablecoins?

Let’s explore how to buy the USDP stablecoin. The process will be the same for any other stablecoin you buy. For your convenience, let’s take the example of Coinbase Wallet. The steps are:

  1. Download the Coinbase crypto wallet as a mobile app or a browser extension
  2. Open an account, set a username and safely store your recovery phrase
  3. Purchase Ether and deposit it in your wallet
  4. Go to the ‘Trade’ tab and select the ‘USDP’ coin from the ‘choose a coin’ section
  5. Once you have set the amount you want to purchase, click on the ‘Convert’ button
  6. Confirm the purchase and follow the instructions to complete your purchase

While purchasing stablecoins, make sure that there is enough Ether to cover the transaction fees. 

If you want to invest in stablecoins, here are a few reputable ones:

  • Tether USD (USDT)
  • USD Coin (USDC)
  • Paxos Dollar (USDP)
  • DAI 
  • True USD (TUSD) and others

Stablecoins are a safe way to explore the world of digital currencies. You can earn interest by staking them, and you can even transfer money quickly and conveniently. Stablecoins are also useful in making international payments with very less transaction fees.