Random Blog on Crypto (Part 48) : Why Stablecoin is so Called?

Stablecoins are named as such because they aim to maintain a stable value. Almost all the cryptocurrencies are vulnerable to significant price fluctuations but stablecoin is different from that. Stablecoins achieve this stability by pegging their value to a fiat currency like the US dollar or any commodity like gold or another asset or basket of assets. The main purpose of backing the asset is to give stability of price to the users with a digital currency that retains a relatively constant value over time. This concept is similar to traditional fiat currencies. We know fiat is backed with gold or foreign currency thus it’s price is not volatile like cryptocurrencies. By applying similar concept the stability is achieved in stablecoins. Mainly A stablecoin is digital form that minimize price fluctuations and provide a reliable store of value. They achieve this stability through various mechanisms, including collateralization, algorithmic control, or a combination of both.

Different types of stablecoins use different mechanisms. Having a backup is important to ensure price stability but what form it will take is not certain as in some cases we see the US dollar and in many cases we see gold and many other types of assets as backups. Stablecoins have played one of the most important roles in the world of cryptocurrency in solving the problem of price volatility in cryptocurrencies. The primary characteristic of stablecoins is their stable value. Unlike volatile cryptocurrencies like Bitcoin or Ethereum, which can experience rapid price swings, stablecoins aim to maintain a consistent value. For example, a stablecoin pegged to the US dollar should ideally always be worth approximately $1. Stablecoins reduce the volatility associated with traditional cryptocurrencies. Users can hold stablecoins without worrying about sudden and drastic changes in their value. The stability of stablecoins makes them suitable for various use cases like remittances, payments, decentralized finance (DeFi) applications etc. Merchants can accept stablecoins for goods and services without the risk of losing value between the time of sale and conversion to fiat currency.

Because of these reasons, stablecoins are considered by everyone as a stable currency. Traders benefit from this because they can store their crypto-based coins through conversion to stablecoins so that the value does not decrease. But this is not the possible with cryptocurrency. This is the solution to price fluctuation of crypto that is why called stabilizing coin or stable coin.

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