Swapping stablecoins and understanding their role in the cryptocurrency market have become increasingly important as investors look for ways to mitigate the high volatility of Bitcoin (BTC) and Ethereum (ETH).
The rise and fall of Bitcoin between 2017 and 2018, led many investors to seek out less volatile options for their crypto investments. Hence, a new type of cryptocurrency was developed to address the fluctuation issue where its value is correlated with real-world assets, particularly the US dollar. However, some may also be backed by algorithms.
Because of their anticipated high stability, these coins are known as stablecoins.
Stablecoins are known to strengthen the connection between conventional finance and cryptocurrency exchanges to be used in many types of payments and settlements since activities like swapping in blockchain networks require a steady and dependable base value.
Types of Stablecoins
Stablecoins are stored on a blockchain network; therefore, it is not backed by any central authority, making them non-custodial assets.
There are several types of stablecoins that are distinguished by assets that support them. The most common types are listed below.
- Fiat-Backed Stablecoins
Stablecoins backed by fiat-collateralized are cryptocurrencies that are maintained as financial reserves as a security for the stablecoin’s value, such as the dollar.
Other types of collateral can be commodities like crude oil or precious metals, including gold or silver. However, the majority of fiat-collateralized stablecoins have US dollar reserves.
Popular examples of fiat-collateralized stablecoins are Tether (USDT), Binance USD (BUSD), and TrueUSD (TUSD), which are pegged to the dollar and backed by U.S. dollar reserves.
- Crypto-Backed Stablecoins
These stablecoins are backed by other cryptocurrencies, usually ETH, rather than fiat currencies. It usually employs smart contracts to safeguard assets as collateral rather than depending on a central issuer to store the reserve.
It means that cryptocurrency is locked up as collateral that supports the crypto-backed stablecoin rather than utilizing money as collateral. To account for price fluctuations, the stablecoin’s underlying token makes a “security pledge.”
A popular example of a crypto-collateralized stablecoin is DAI. DAI doesn’t have a 1:1 ratio for the actual crypto collateral because it can’t maintain its peg during intense market volatility. Therefore, to make $100 worth of DAI, users might need to lock up $150 worth of ETH.
- Algorithmic Stablecoins
It is known that a 1:1 ratio always backs stablecoins, but it’s not always the case.
Algorithmic stablecoins are assets that rely upon other crypto tokens – a stablecoin and another crypto asset supporting the former stablecoin. It maintains its value by using an algorithm to restrict its supply.
These algorithms often link two coins and then modify their prices in response to investor supply and demand.
A perfect example of an algorithmic stablecoin is TerraUSD (UST), which is backed by a regular cryptocurrency, Terra Luna (LUNA). So, if the UST price surpasses its pegged US dollar value, a portion of it will be burned. If the UST price drops below a dollar, a portion of LUNA will be burned.
It is to be noted, though, that algorithmic stablecoins do not require collateral for liquidity, meaning that everyone risks losing funds in the event of a crash.
Swap Stablecoins with Riverex
If the best way to understand the DeFi world is to experience it, visit the Riverex Peer-to-Peer page and start swapping your stablecoins to other cryptocurrencies and vice versa.
Currently, Riverex accepts stablecoins such as USDT, BUSD, and DAI. The platform offers over 260 tokens and coins to swap from, including the Riverex token, WELLE.
You can also add and swap your stablecoins to a liquidity pool to provide asset liquidity.
What’s more exciting is to create a liquidity pool and earn token rewards every time traders swap their stablecoins and other cryptocurrencies from your pool.
We want to make things easier for you, so we have organized a tutorial on all Riverex services.