Most people who have just gained interest in cryptocurrencies may be more familiar with the Bitcoin rather than the stablecoin currency. This is no surprise as the latter is a newer breed of digital currency. Many hope that this new cryptocurrency will be more reliable and useful than its predecessor.
A simple definition of a stablecoin can be “a digital currency with stable price characteristics”. Its purpose is to provide a cryptocurrency which can actually be used as an everyday means of exchange and to be a volatility-free currency.
Bitcoin Versus Stablecoin
While the former continues to be the most popular form of cryptocurrency today, there are several reasons why the latter can be a sounder investment.
– Its valuations suffer from very high volatility (it is not uncommon for it to move more than ten percent in either direction in just a span of a few hours).
– These wild swings of volatility make it unsuitable for everyday use since the public is unsure of its purchasing power the very next day.
– Fiat currencies are free from extreme volatility because they are pegged to reserves that back them (otherwise known as underlying assets).
– The controlling authorities of fiat currencies take action when there is a need to manage the demand and supply of currency. This means they are able to maintain the stability of prices.
3 Types of Stablecoins
Currently, there are three major categories of stablecoins which have been classified according to their working mechanisms. However, it won’t be surprising if we hear more about stablecoins proposals in the future since this currency is still in its developing stages. For now, here are the three major types. See more at KINESIS
It is considered the simplest but the most centralised type. This is because it is backed by cryptocurrency reserves which are extremely volatile. And since these underlying assets are highly unstable, there is a need to over-collateralise—users are required to deposit a large number of crypto assets yet they receive a smaller amount than what they deposited.
This is the most clear-cut method for creating a stablecoin. Users receive a token for investments which are placed in reserves that are held and managed by a central authority. Therefore, it is also considered the most centralised type of stablecoin. The underlying assets can be in U.S. dollars or in oil and other commodities.
They can also be in gold and silver, such as the new digital currency called Kinesis. Its primary currency is based on 1:1 allocated physical gold and silver. According to the Kinesis website, this will be globally available, usable, and reliable and will form the basis of a new monetary system. Want to know the detailed definition? Click here to read it.
As the name suggests it isn’t backed by any collateral. Instead, it uses a mechanism similar to a central bank or an algorithm which dictates the price, supply, and demand. For example, the supply decreases when the price is less than 1.00 USD and increases when the price is more than 1.00 USD. This method will hopefully influence the upward and downward price trends based on need.
A Monetary System Gaining More Attention
Stablecoin is considered by many experts to be the next “big thing” in cryptocurrency. Many big-name capitalists, digital geeks, and even traditional financial circles are gravitating towards it due to its interesting and intriguing concepts.
If you are also attracted to the benefits of stablecoins, make sure to have a good grasp and understanding of what this digital currency is all about. Find a reliable stablecoin guide and seek advice from experts before making decisions and purchasing. Remember that this cryptocurrency is still in its budding stages and future changes and developments can be expected. For more information, visit their website at: https://kinesis.money/en/guides/what-is-a-stablecoin/