Stablecoin is a popular word in the crypto world that indicates the bitcoin exchange that are stabilized in price. Suppose tether is a stablecoin, and it is because the value of ether is stable and doesn’t fluctuate much. But it is the most volatile one too. Stablecoin is just the opposite. It is backed by other things like fiat currencies or commodities that have stable values. So, the value of stablecoins is also stable.
What is a stablecoin?
A stablecoin is a kind of crypto token that has less volatility than cryptocurrencies like bitcoin. Stablecoin is an alternative cryptocurrency that aims to reduce its price volatility. One method is to peg the value of the stablecoin to another asset, often a fiat currency like the US dollar. However, there are also stablecoins pegged to commodities like gold. Collateralization with a real, financial, or digital asset can help keep the price stable in contrast to collateralized stablecoins, which rely on market forces to keep prices stable; algorithmic stablecoins leverage supply and demand to keep prices constant.
Classification of stablecoins:
Stablecoins can be classified into various distinctions. They are given below-
- Fit currency-backed stablecoin: The value of these stablecoins is backed by fiat currency’s value. That is why they are the least volatile crypto assets. The collateral underlying these assets is not some other cryptocurrency; for that reason, they are stable and called off-chain assets. The regulation is organized, and the assets remain in control by the central financial issuer institution.
- Crypto collateral: These are backed by other cryptocurrencies. They use smart contract functioning on the different blockchains of respective cryptocurrencies. These stablecoins are considered on-chain stable assets for that reason. So the volatility matches those cryptos mostly; however, in this case, they are minimum.
- Commodity-backed stablecoin: Stablecoins can also be backed by commodities, and the most used one is precious gold. As it is a known factor that gold’s price is more stable than bitcoin’s, gold has been used as a backing asset by the world for many years now; it also helps to maintain the stablecoins value in minimum fluctuations.
- Algorithmic stablecoin: Instead of using fiat currency, commodity, or other cryptocurrencies, these stablecoins determine their value by specialized algorithms and smart contracts. By controlling the number of circulated tokens, the value of these stablecoins remains stable.
Do other tokens have similar features to stablecoin that are important to know?
Some more crypto tokens other than stablecoins are also rising in the market and gaining popularity in recent days. One vital token or crypto asset is a utility token that demands your concern.
A utility token is a digital token with some practical application for its owner. These tokens have further classifications. They are-
- Money Tokens: These tokens are typically used to gain entry to, or receive a discount when using, a cryptocurrency exchange (also known as an Exchange Token). The BNB coin used on the Binance exchange is a good example.
- Tokens for Use in the Infrastructure Market: Ether, the native coin on the Ethereum network, is the most well-known infrastructure token. Infrastructure tokens can cover the costs of executing smart contracts, transferring funds, or deploying decentralized applications (Dapps) on the network. Cardano (ADA) and Solano (SOL) are two further well-known examples besides Ether (SOL).
- Tokens for Participation in Governance: To protect the decentralized character of a cryptocurrency network, Governance Tokens allow its holders the ability to vote on crucial protocol upgrades. Instead of having a few people with too much authority make decisions, the community may use voting to choose which suggestions will be implemented.
- Service Tokens: Some cryptocurrency projects provide Service Tokens, which may be used to gain access to a network or carry out certain actions. Users interested in Cloud storage can rent the service’s unused hard drive space. In this case, customers would pay with Storj’s native utility coin.
All these stablecoins have price stability and are good and safe for investment. However, they can’t generate much profit as they don’t fluctuate much. Instead, investing in bitcoin will give you more profit if it can be done with a powerful strategy. Bitcoin circuit is a good and reliable trading platform that you can check for bitcoin trading.