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Stablecoins: How do they work?

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By definition, stable coins are cryptocurrencies created to minimize volatility because they are designed as a more stable asset; this is also known as a fixed exchange rate where a currency’s value is set against any other currency’s or asset’s value like USDT(Tether).

The price of a stable coin is not influenced by market conditions, and various things back stable coins. The first and most common are the Fiat-backed stable coins. Crypto coins like the USDT and USDC are supported by the US dollar meaning 1 USDT coin will always be worth one US dollar. Then there are Commodity-backed stable coins. The value of these coins is fixed to commodities like Gold and Silver and are less likely to be inflated. Lastly, there are Cryptocurrency backed stable coins; they are supported by the value of another cryptocurrency. An example of a Cryptocurrency-backed coin is Le-Dai which is backed by the Ethereum blockchain.

Stable coins allow investors to access the market without going between the Fiat banks, and it also allows investors to deposit large amounts of cash without going through a traditional banking system. The promise of stability with these coins is what attracts investors the most.

Each type of stablecoin has its own set of advantages and disadvantages, and none of them are perfect. However, the value and stability they could provide to businesses and individuals around the world — by allowing universal access to established national currencies, facilitating payments and remittances, and supporting emerging financial applications — could be disruptive.

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