A stablecoins is a form of digital currency whose value is attached to an external asset to offer users a degree of stability. 

One of the biggest drawbacks to the mainstream adoption of cryptocurrencies is the volatility of their prices. The constant fluctuation makes them unsuitable for day-to-day use, however, stablecoins were introduced to resolve this issue.

How it works is that each unit of a stablecoin is pegged to a unit of another asset, typically a more stable fiat currency that is a government-issued currency such as the US dollar or Euro. Stablecoins can also be tied to valuable commodities such as gold. 

Types of Stablecoins

Stablecoins can vary depending on the backing assets, let’s take a look at a few different kinds;

● Fiat-backed Stablecoins

These are the most common types of stablecoins, they are backed by government or central bank-issued currencies, usually the US dollar, although other options such as the pounds are also used relatively often. They are typically tied in a 1:1 ratio, what this means is that if a stablecoin is pegged to the USD one unit of it is equal to a dollar.

● Crypto-backed Stablecoins

Some stablecoins have their values pegged to other digital currencies such as bitcoin or ethereum. At first glance, this defeats the main purpose of stablecoins, however, aware of this, the creators of such stablecoins pair them to the reserve asset in unbalanced ratios.

Essentially, a large number of backing coins are tied to a smaller quantity of rhe stablecoin, the over-compensation is used to make up for the volatility of the cryptocurrency.

● Stablecoins Backed by Precious Metals

Gold and other similar precious metals can be used as collateral for stablecoins as they are generally acknowledged as a good store of value. The backing assets must of course be stored securely.

● Smart Contract-backed

These stablecoins are not pegged to any currencies. In place of a reserve asset, smart contracts are implemented as a mechanism to monitor fluctuations and maintain stability. The consensus mechanism automatically adjusts the ratio to 1:1 thus ensuring a stable price.

Conclusion; How Stablecoins Can be Used in the Present Financial Framework

A great example of how stablecoins can be implemented is crypto savings accounts. Investing a stablecoin on a platform such as BitcoinzTech allows users to earn profits through passive income while evading the volatility of crypto assets and the risks that come with trading.

Stablecoins facilitate easy entry into the crypto space, they merge the flexibility of cryptocurrencies with the practicality of fiat money making them ideal for long-term investments.