What are Stablecoin in Crypto? – How it Work explained?

Stablecoin: What if there was a way you could buy a cryptocurrency that was basically cash, it didn’t change value, but it still was transferable and tradable as a crypto? No more days of panicking and seeing an Elon Musk tweet pumping and dumping his coin of choice. No more wondering if you lost your grandpa’s pension funds that you had invested.

While that sounds Juicy, given there has been a white plumbers van across our road for 3 days now, we want to say that this video was made for education and entertainment purposes, anything you do outside of this video is on you. We just want to be able to help you make the most educated decisions.

What exactly is a Stablecoin ?

Stablecoin

A stablecoin is technically a Utility token built upon another coin’s blockchain. If you don’t know the differences between tokens and coins you can check out our article on that topic as well. But the entire goal of a Stablecoin is to create a cryptocurrency that isn’t volatile and doesn’t change price. 

They offer the convenience, privacy, and security of crypto, while offering the stability and trust of fiat money. Just like here at whiteboard crypto, we try to offer the best of both worlds, education about crypto and entertainment using stories and examples so you’re not bored through the entire video. By the way, if you haven’t already, you should click that like button because it helps keep our motivation to create more videos stable. 

A stablecoin is pegged to the US dollar and will always equal $1. Theoretically. Bitcoin, the first cryptocurrency, was actually created to be used as a store of value. However, since it’s not widely adopted and there aren’t many regulations on it yet, the price fluctuates a lot. So much so that it is classified as a speculative investment. 

So what if you want to store money using crypto technology, but don’t want to risk your investment with the price fluctuations of crypto? Use a trusted stablecoin.

Before we get too deep into stablecoins, you first need a refresher on the differences between a centralized exchange and a decentralized exchange. 

Stablecoins are also beneficial when investing on platforms or AAVE, where you can earn interest on your crypto assets, because you don’t have to worry about price fluctuations. 20% APR on ETH doesn’t matter if ETH drops by half. However 20% APR on your USDC stablecoin is delicious. 

How do Stablecoins work?

Stable coins work in two different ways. Collateralization or through algorithmic mechanisms aka smart contract manipulation. 

1. Fiat Collateralization

Fiat Collateralization means that each coin is backed by something. In most cases, that is one US dollar. In some though, it’s other countries currencies (like the euro) or even gold. 

Tether is one major company that released their USDT stablecoin using Fiat Collateralization. There are some rumors they don’t have a dollar for every USDT. The pros of a fiat collateralized stablecoin is that they are quite stable, much more than the alternative. 

2. Smart Contracts

As an alternative to the fiat collateralization method, some stablecoins are controlled by a smart contract. Some people call this Algorithmically pegged stablecoins. The benefit of this method is that it is very easy to audit – you just take a look at the smart contract code. Another benefit is that there are no physical assets to steal. 

However, some of the problems can seem much worse. Smart Contract Controlled stablecoins are usually much more volatile simply due to how they work. Smart Contracts must manipulate the supply of their coins to adjust the price. 

How do you buy a Stablecoin?

Stablecoins are bought and sold on exchanges, both centralized and decentralized. It’s very easy to buy Tether, Dai, or USDC on Coinbase or Gemini. You can also buy something like ETH on coinbase, transfer it to your wallet, and then use a decentralized exchange like Uniswap to trade that ETH to a stablecoin. 

If you’re wanting to learn how to earn a much higher interest rate than what most banks can currently afford, we recommend lending out your stablecoins.

Lending your crypto to a place like AAVE or Curve can easily earn you 10-20% APR in the current crypto atmosphere. 

Conclusion

Stablecoins are a great advancement for crypto at the current moment and we’re excited to see where they go here in the future. If you’re going to put your money into them we would be cautious and as always, recommend doing your own research. 

LEAVE A REPLY

Please enter your comment!
Please enter your name here