What is a Stablecoin

The technical mechanism behind stablecoins can vary depending on the type of coin. For example, some stablecoins are backed by a reserve of fiat currency, while a commodity like gold may support others.

• Fiat Collateralised:

The most common type of stablecoin is the fiat-backed variety. As the name suggests, these coins are pegged to a specific fiat currency, such as the US dollar or Euro. Each coin is backed by a real-world asset held in reserve to maintain the peg. For example, for every USD-backed stablecoin in circulation, a US dollar is stored in a bank account.

If the price of the stablecoin begins to fall, the issuer can buy back coins from the market to maintain the peg. Similarly, if the value of the stablecoin starts to rise, new coins can be issued and sold on the market to bring the price back down.

Fiat-collateralised stablecoins are the most popular type of coin due mainly to their simplicity. However, they are also the most centralised, requiring a trusted third party to hold and manage the reserves.

• Crypto Collateralised:

Crypto-collateralised stablecoins are coins backed by a reserve of cryptocurrency rather than fiat currency.

This approach has a number of advantages over fiat-collateralised stablecoins. First, it eliminates the need for a central authority to hold and manage the reserve. Second, it provides a hedge against fiat currency collapse, as the value of the cryptocurrency backing the coin is not linked to any single fiat currency.

The main downside of crypto-collateralised stablecoins is that they are subject to the same volatility as the cryptocurrency they are backed by. For example, if the price of Ethereum were to crash, so would the value of Dai.

• Algorithmic:

Algorithmic stablecoins are a newer type of coin that use complex algorithms to preserve a peg to a specific asset, often USD. The advantage of this type of coin is that it should theoretically be much more resistant to sudden changes in market conditions, as the algorithms can adjust quickly to buy or sell the underlying asset.

This type of stablecoin offers a good middle ground between the security of a fiat-backed coin and the decentralisation of a crypto-collateralised currency.

The downside of this approach is that it is very complex, and there is a risk that the algorithms could fail, leading to a loss of value.

Use cases for stablecoin

Stablecoins have several potential use cases within the cryptocurrency ecosystem and beyond.

• Hedge against volatility

The most obvious use case for stablecoins is to provide a hedge against the volatility of cryptocurrencies. For example, if you hold Bitcoin and the price drops, you can swap your Bitcoin for a stablecoin and mitigate losses.

This hedge is particularly useful for traders and investors who need to make a quick profit or loss change in response to the market. It also allows you to hold your position without worrying about your asset’s value fluctuating wildly.

• Stable price-pegging

Another use case for stablecoins is to provide a stable price-pegging mechanism for other assets. For example, if you are selling goods or services denominated in USD but you only accept cryptocurrency, you can use a USD-backed stablecoin to ensure that your prices remain stable.

This stable price-pegging can also be helpful for smart contracts, as it allows you to create contracts that are not affected by sudden changes in the underlying asset price.

• Blockchain interconnection

Stablecoins can be utilised to interconnect different blockchain networks. For example, if you want to use the Ethereum network but store your assets on the Bitcoin network, you can use a stablecoin pegged to USD to move your assets between the two networks.

This type of interconnection is vital for developing the cryptocurrency ecosystem, as it allows different blockchain networks to interact without the need for a centralised exchange.

• Earn interest

As stablecoins become more popular, there is an increasing demand for ways to earn interest on them.

There are many ways to earn interest on stablecoins, such as lending them out through a peer-to-peer lending platform or staking them in a proof-of-stake cryptocurrency.

With AQRU, you can enjoy returns of up to 7% interest on your stablecoins by simply holding them in your AQRU account.