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What are stablecoins?
A stablecoin is a cryptocurrency that is designed to fluctuate as little as possible from a specific value. The most popular stablecoins use the U.S. dollar as a benchmark and maintain a price very close to $1 if they are functioning as intended. Of course, there are also stablecoins pegged to other currencies such as the euro or the Japanese yen.
How do stablecoins work?
Most of the popular stablecoins maintain their price because they are backed with reserves of fiat currency. In other words, the entity that is creating the stablecoin guarantees 1:1 redemption of the stablecoin in exchange for the underlying currency, although this process usually comes with a fee.
There are exceptions, however – DAI, for example, uses a completely different model and maintains a price close to $1 by using a system of smart contracts and ETH as collateral.
Why are stablecoins useful?
"The most popular use of stablecoins is to quickly switch between a volatile cryptocurrency and a more stable asset. For example, if a trader holds BTC and expects its price to fall, they can almost instantly trade their BTC for a stablecoin to protect their holdings.
Stablecoins also enable cryptocurrency exchanges that do not support fiat currency trading to list an asset with a relatively stable value.
Stablecoins provide the standard benefits of cryptocurrency without bringing price volatility into the picture. The idea of sending a stable currency worldwide on a 24/7 basis at a low cost holds a lot of promise, and there are multiple projects working on stablecoin adoption for uses beyond trading.
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