What does stablecoin mean? What is the definition of a stable currency and what is the difference between a stable coin and a normal digital currency and cryptocurrency?
With the increasing popularity of digital currencies and the crypto market in general, the number of active users in this area has also increased significantly and the volume of market transactions has increased. The entry of this number of users and liquidity into the market can increase the profit of the activists in this field, but the same amount of profit can turn into a loss at other times. It is at these times that the existence of a special type of cryptocurrency called stable digital currency or stablecoin can be useful. Stable coins have the role of stable and safe currencies of the crypto market, and in times of extreme market fluctuations, you can save profits and avoid losses by converting other cryptocurrencies to them. The most famous stablecoins include Tether (USDT), Dai (DAI), Binance Dollar (BUSD), USDC and True USD (TUSD).
These types of digital currencies are tied to fiat money such as the US dollar, other cryptocurrencies, precious metals, or a combination of all three. The reason for this dependence is trying to keep their prices stable. Each unit of a stablecoin always has a fixed price regardless of the general market conditions, that's why they are also known as stable and stable digital currency. The most important ones such as Tether (USDT), USDC and Binance USD (BUSD) are backed by the US dollar and the price of each unit is always one US dollar.
Despite the variety of assets that can be backed by stablecoins, the most popular option to date has been fiat currencies, especially the US dollar. As we said, a stable and stable digital currency will always have the same value regardless of the state of the cryptocurrency market; Even if the price of Bitcoin, Ethereum and other top cryptocurrencies in the market drops to one hundred dollars or increases to one hundred thousand dollars, one unit of Tether or other popular stablecoins will still be worth one dollar.
Stablecoins are designed to counter the inherent volatility in the price of cryptocurrencies. Stable cryptocurrencies are usually collateralized, so that the total number of circulating units within their network is backed by stored assets. For example, Tether Limited, the developer of the most famous and widely used stablecoin market, claims to lock one dollar in a bank account as collateral for issuing one unit of USDT on the blockchain network. In short, if there are 500,000 coins in the blockchain network, at least $500,000 must be stored in the bank as backup.
Due to the sudden volatility of Bitcoin and other altcoins, advocates of stable cryptocurrencies believe that their existence limits conversion rate risk and losses. Also, these features increase the effectiveness of cryptographic digital currencies for purchasing goods and services. For example, today many people use stablecoins for various things, such as making international remittances, despite not being interested in investing in digital currencies.