What is the difference between stablecoin and cryptocurrency?
Stablecoin is a term for a type of cryptocurrency that holds stable values. They are essentially a digital token on a blockchain whose value is pegged to another currency.
Stablecoin is different from other forms of cryptocurrency like Bitcoin because it erases any concerns that may surround the ever-changing cryptocurrency values. With stablecoin, there is
no fear of a sudden drop in value or a massive upswing in the price.
What made stablecoin stable?
Stablecoins are made stable since they are backed by currency. Their value is pegged by at least one or more currency, mainly the U.S. dollar in a fixed ratio. This is done off-chain by banks or other financial institutes which serve as holders of the currency that is being used to back stablecoin. This makes stablecoin stable, while cryptocurrency is not regulated by a third party entity.
A stablecoin is a type of cryptocurrency that’s tied /pegged to a fiat currency (often USD) or some other peg (maybe a commodity?), with the intention of having an anchor to the price. The idea is to minimize (alleviate) volatility.
Tether has been a very popular example and was supposed to have been backed 1:1 to the USD (need sufficient reserves), but there is now controversy as to whether those funds actually exist. There now may be loans attached to the peg, but to 1:1 fiat. It still trades around 1.00…
A token issuer or central party has to maintain the peg by holding and having these reserves. Since it mitigates volatility, a lot of coins trade agains a stable coin. BTC/USDT for example is BTC against Tether. So you’re trading BTC cryptocurrency against a stablecoin, which reduces volatility but can add a premium to the price.
Stablecoins, such as Tether, Carbon or Ultra USD are pegged in some manner to the value of a traditional currency, such as gold or the US dollar. They are fiat-free and issued through blockchain technology.
Unlike traditional cryptocurrencies, such as bitcoin, they are less volatile and more
practical for frequent use. They hold the benefits of cryptocurrency without the volatility.
A stable coin can be a type of cryptocurrency if it uses a decentralized ledger protocol around aspects of its issuance.
Not all stable coins are cryptocurrencies – but even Ven, the longest running and most stable digital currency, has features of a stable coin and crypto extensions through the Ethereum ERC20! protocol.
Typically stable coins get their stability from a link to traditional fiat currency or other assets – implying that their stability comes from asset backing or a price peg.
For instance Ven, which is an asset backed digital currency, gets its stability from a mix of assets including fiat, commodity and carbon backing. As the prices of these backing assets fluctuate, they tend toward
high stability for Ven itself, which performs with high stability due to a range of backing assets instead of a single one.