Why are stablecoins important? — AAX Academy

Stablecoins are an essential part of the crypto ecosystem. What makes them different from other currencies like Bitcoin and Ethereum is that their price is stable relative to another asset. Most cryptocurrencies are prone to fluctuations, sometimes dramatically so. This can be great for speculators who quickly trade in and out of currencies to make a profit, but for certain use cases like spending crypto or portfolio diversification during times increased volatility, stable prices are crucial.

What makes stablecoins, stable?

There are two main types of stablecoins:

  • Fiat collaterised
  • Crypto collaterised

Fiat collaterised (trusted)

Crypto collaterised (trustless)

There is a third model for creating stablecoins that uses smart contracts programmed to maintain the peg by increasing and decreasing the supply of the stablecoin to counter fluctuations in the market. This model is referred to as non-collateralized but it is still somewhat experimental with no significant market share to speak of.

Use cases for stablecoin

Crypto money designed for spending

Better trading experience

Diversifying stablecoins

For example, holding stablecoins across USD, EUR, CAD and JPY achieves diversification, but still leaves you exposed to the reliability of a single stablecoin per fiat currency. If you’re only holding GUSD for US dollar, then all your eggs are still in the Gemini basket. Instead, it’s better to spread your USD stablecoin holdings across a number of coins such as GUSD, USDT, DAI, USDC and so on.

Originally published at https://academy.aax.com on September 7, 2020.

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