What is a stablecoin? A thorough explanation of how it works and its types.
Cryptocurrencies and stablecoins sometimes get mixed up...
That is understandable.
This is because stablecoins are cryptocurrencies, and their purposes differ somewhat from other cryptocurrencies.
In this article, we thoroughly introduce stablecoins, their mechanisms and types.
If you read to the end, you will understand stablecoins, so please read all the way through.
What Stablecoins are
Compared with cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), stablecoins are cryptocurrencies with more stable prices and lower volatility (Volatility ※1).
Volatility refers to the price's fluctuation and rate of change.
In other words, high volatility means the price is not stable.
The biggest characteristic of stablecoins is, indeed, their price stability.
As described in more detail below, stablecoins are mainly developed for practical uses such as everyday payments.
Bitcoin was also expected to be practically used as a new settlement currency, but currently there are many issues such as high volatility, fees, and scalability (※2), so it has not been used in the way initially hoped.
Scalability issues refer to problems that arise when the size (scale) of blocks that store transaction information is small, causing delays in finalizing transactions and rising fees.
>>>What is Scalability? An easy-to-understand explanation for beginners
Types of Stablecoins and How They Work
There are three major types of stablecoins.
- Fiat-collateralized
- Crypto-collateralized
- Unsecured (algorithmic)
Each has distinct mechanisms to stabilize price, so let’s explain them in order.
Fiat-collateralized
First, the Fiat-collateralized type.
Fiat currencies (※3) are, for example, the Japanese Yen in Japan, or the US Dollar in the United States, and are issued by governments and used with legal force in their respective countries.
Quote:Wikipedia
Fiat-collateralized stablecoins are stable because the value of a chosen fiat currency is linked (pegged) to the value of the cryptocurrency.
Fiat currencies have low volatility and stable prices.
Taking the US dollar and Japanese yen as an example makes this easy to understand.
For example..............Continue here below
>>>View on the official site of Cryptocurrency Trivia
