What is a Stable Coin?

Volatility is a big concern for most people when it comes to cryptocurrencies. They want stability.

People want to be able to use crypto coins to buy their dream house or go on their next vacation. They also want to be confident enough to use these digital assets as a store of value.

This is where stable coins come in.

A stable coin is a type of cryptocurrency that is pegged to another store of value like gold, fiat currency like EUR and USD or another cryptocurrency that possesses a stable value to make it stable. This is done to combat its volatility.

When the value of a currency is more stable, the currency can be used for normal day-to-day transactions. People could be paid for their work in cryptocurrency and can enjoy stability while carrying out transactions with it.

Based on what they are pegged to, stable coins can be grouped into three major types.

Fiat-backed Stablecoins

These types of cryptocurrencies are backed by fiat currency to combat volatility. Some examples of stable coins that fall under this category are Tether and TrueUSD (TUSD).

Cryptocurrency-backed Stablecoins

These types of stable coins are backed by other cryptocurrencies. Examples of Stablecoins that fall under this category are MarkDAO and Havven.

Non-collateralized Stablecoins

Through the Seigniorage shares system, these stable coins aim to stabilise their value. The seigniorage system is simply the difference between the value of money and how much it costs to print the money. Cryptocurrency projects that fall under this category are Basis, CarbonUSD, Kowala and Fragments.  

In a nutshell, even though stable coins do not fall under the most important cryptocurrencies in the market today, they still play an important role. Asides bridging the gap of stability, they also set the pace for the longterm stability and usability potential of other cryptocurrency types.

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Quidax is an African focused cryptocurrency exchange that provides a simple platform for you to send, receive, store, buy and sell digital currencies. Our aim is to educate you about cryptocurrency. It should not be considered as financial advice. We recommend conducting your own research before deciding to buy, sell or hold any cryptocurrency.