What are stablecoins and how is it different from other crypto?

MiTSoftware.com
5 min readMar 21, 2023

Since its invention in 2018, the technology of Blockchain It has been evolving rapidly, and has remained in recent years among the growing popularity trends within different industries globally.

Without a doubt, the digital age is one of the aspects that has brought great changes and updates in terms of technological trends, and when it comes to blockchain technology and cryptocurrencies, it seems that innovation and new projects continue to grow day by day.

Although the world of cryptocurrencies is a completely separate financial system, companies and organizations have seen the need to revolutionize their financial and commercial transaction systems, to create new payment systems that allow themmitto carry out operations from any part of the world and at any time.

For this purpose, stablecoins or stable cryptocurrencies are born, as a form of digital representation within the chain of blocks for fiduciary money. In this article we tell you what stable coins are and how they differ from other crypto.

Cryptocurrencies: The digital alternative to fiat money

To understand what stablecoins are about, it is first necessary to understand how a traditional cryptocurrency works.

We know that cryptocurrencies are a digital currency whose purpose is used towards cryptography, with the aim of guaranteeing secure transactions in a completely decentralized way through the use of blockchain technology. Unlike fiat currencies, cryptocurrencies are not backed by any financial organization or institution.

On the other hand, cryptocurrencies use market capitalization to mark their value. Cryptocurrencies encompass a variety of contexts, including cryptocurrency trading, online payments, and digital identity management, as they continue to develop and gain greater acceptance.

That is why stablecoins emerge as a response to the volatility that characterizes traditional cryptocurrencies, such as Bitcoin y Ethereum. When it comes to an alternative that can take advantage of blockchain’s signature functionalities but at the same time is able to maintain its value, that’s what stablecoins are all about.

What are stablecoins and how is it different from other crypto?

Entering into a general context of what stablecoins are about, we can say that they have become an increasingly popular tool in the global economic environment, as their objective is focused on solving one of the biggest problems or challenges that The cryptocurrency sector presents: the volatility that characterizes the traditional crypto market.

In this sense, stablecoins are specially designed to maintain their 1:1 value, that is, 1 US$ is equal to 1 digital token or stablecoins. They can be created yemitHeld by individuals or companies, and may be backed by a pool of underlying assets, such as fiat currencies, commodities, or other cryptocurrencies. Currently there are renowned cryptocurrencies such as Theter and Padox, which are backed by gold as a mechanism to respond to financial supply and market demand.

How do stablecoins work?

Now, stablecoins are a type of cryptocurrency that can be backed by an underlying asset, such as a fiat currency or commodity, or rely on an algorithm that regulates the supply to maintain a stable value. With asset-backed stablecoins, the issuer holds a reserve of the underlying asset in proportion to the number of stablecoins andmitgone. For example, if the stablecoin is backed by US dollars, the issuer will hold a reserve of US dollars equal to the number of stablecoins andmitgone.

Alternatively, stablecoins can rely on an algorithm that adjusts the supply of coins to maintain their value. They use a series of commands that allow you tomitin the algorithm to maintain demand, as well as increase to market demand if necessary.

The operation of a stablecoin depends to a large extent on the type of coin, however, its purpose remains the same in terms of stability in value, either in relation to an underlying asset or through the use of algorithms.

Advantages of stablecoins in relation to other crypto

Stablecoins present a huge list of benefits for businesses. From traceability functions, cost reduction and transaction security, to a new way of creating payment methods and ensuring decentralized finance in a company. Among these advantages are:

-Backed by assets: stablecoins are emitissued by an organization that pegs the digital asset to its economic reserves, typically a physical currency or commodity. This provides a stable value for the currency and reduces volatility in the market.

-Value security: stablecoins are pegged to physical currencies such as the dollar or the euro, protecting user savings from market fluctuations. This makes them an attractive option for investors looking for stability.

-Intermediary currency: Stablecoins can function as intermediary currencies to facilitate the exchange of other cryptocurrencies. This facilitates the use of cryptocurrencies for everyday transactions and services.

-Lower transaction costs: stablecoins can permitgo faster and more efficient transactions due to its stability, resulting in lower transaction costs compared to other cryptocurrencies. This makes them an attractive option for businesses and individuals looking to reduce transaction fees.

-Versatility: Stablecoins are versatile and can be used in a wide range of applications, including international payments, peer-to-peer transactions, and decentralized finance (DeFi) transactions. This makes them more adaptable than other cryptocurrencies that may have limited use cases.

It is clear that stablecoins are synonymous with advancement and technological evolution. As the cryptocurrency market continues to evolve, Stablecoins are likely to become an increasingly important part of the digital economy.

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