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What are Stablecoins and How Do They Work?

The crypto market can be wild ride. The price of crypto can dramatically rise and fall, but, there are digital assets that don’t experience as much market volatility as other coins — enter Stablecoins. 

Given that volatility drives cryptocurrency prices up and down, stablecoins might be confusing at first. But they open a new range of possibilities for cryptocurrency users.

But what are stablecoins? In this article, you’ll learn more about them, how they work, and what you can do with them.

A Quick Introduction to Stablecoins

Stablecoins are cryptocurrencies that maintain the same value. Unlike Bitcoin or Ethereum, they don’t suffer volatility or drastic price swings.

Due to the lack of volatility, stablecoins don’t see all-time highs. There might be some price fluctuations — due to the volatility of the crypto market, but at the end of the day, the purpose of stablecoins is to maintain a stable price.

Stablecoins are created with blockchain technology, making them near impossible to counterfeit or manipulate, similar to other cryptocurrencies. Their use is also on the rise, and in 2021 the supply was up by almost 500%.

Although you can send stablecoins to other people, they’re still not widely used as a form of payment. But they open up new avenues for borrowing and lending, making it a lot easier and faster than traditional institutions.

How Do Stablecoins Work

Stablecoins use various methods to maintain their price constant.Here are a few examples of stablecoins and the methods used to do so:

  • Stablecoins pegged to Fiat currency: Fiat-backed stablecoins are the most used type of stablecoin and have the largest market cap.
  • Crypto-pegged stablecoins: These stablecoins use other, more valuable cryptocurrencies to over-collateralize their value. Even if that cryptocurrency value drops, the over-collateralization maintains its price constant.
  • Stablecoins backed by precious metals: Precious metals have always been a safe harbor for investors in times of inflation and economic crisis. These coins are centralized, and many investors see that as a drawback. However, they also allow you to invest in precious metals without buying them.
  • Algorithm-backed stablecoins: These stablecoins aren’t backed by assets, instead they use an algorithm to control price and supply. The algorithm mints stablecoins when there’s demand or burns them when the supply is too high.

How Can You Use Stablecoins?

Since stablecoins maintain roughly the same price, they won’t bring you a high return if you only HODL them.

They might not serve as speculative assets, but you can use them in many other ways and open up new roads for your crypto investing goals.

Here are a few examples of how you can use stablecoins:

Transfers

You can use stablecoins to transfer money to anyone, anywhere, fast and cheap. Since their value stays the same, it’s one of the easiest ways to transfer currency to another person’s digital wallet.

Security

Some crypto traders use stablecoins as a safe haven in times of inflation and volatility. If you trade cryptocurrency, you can transfer your earnings to stablecoins and avoid the volatility of the market. You can also use stablecoins to avoid fiat currency inflation.

Borrowing

Another popular use method of stablecoins is borrowing against your crypto assets. While applying for a loan from a traditional banking institution might be time-consuming, stablecoins offer a new opportunity for loans on DeFi or other crypto platforms.

Learn how to apply for a crypto loan with 0% interest on Abra Borrow. Check out our Money Talks episode here to learn more.

Lending or Staking

You can lend or stake your stablecoins in a crypto banking institution or other platforms to earn annual percentage yield (APY) on your assets. Although these platforms are centralized, CeFi can be a safer option for you, and you don’t need to stake other crypto assets.

Alternatively, you can also lend or stake your stablecoins on DeFi platforms. While the APY you can earn on those platforms can be higher, you need to do your due diligence and be mindful of its risks. You also have to stake other crypto assets on most of those platforms.

If you want to learn more about DeFi and its best practices, check out our article on DeFi. Learn the best ways to use that technology to your advantage and what to look out for.

You can also earn interest on your assets with a platform like Abra. Get paid to hold your stablecoins and earn bonus CPRX, which you can earn interest with CPRX too! Learn more about Abra Earn here.

Start Earning Interest with your Stablecoins Today!

Be it borrowing, staking, or simply using stablecoins as a safe haven, they provide stability in a very volatile crypto world.

Open up new roads for your crypto investing goals! Download the Abra app and start earning interest on your stablecoins today!