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How Do Stablecoins Work? How to Borrow Stablecoins for 5% APR!

It has become evident that the blockchain industry is revolutionizing the finance sector, among others. The technology aims to build a new and upgraded payment system for the world among other emerging use cases. It provides a system that is secure, open, decentralized, fast, and utilizes crypto as a means of exchange.

However, cryptocurrencies have been considered volatile investment instruments. It results in price jumps and crashes that, due to vendors’ and merchants’ risks, often prevent cryptocurrencies from being used for daily goods and services.

Stablecoins come in to solve this. The argument is that if you create a currency that is ‘pegged’ or attached to a regular fiat currency, such as the US dollar, or something with a stable price, you can avoid such price changes. Let’s understand what are stablecoins and how stablecoins work:

What are Stablecoins? 

So then, what are stablecoins? The United Nations recognizes 180 currencies worldwide, ranging from the US dollar to the Indian Rupee to the Japanese Yen and many more. Meanwhile, the number of stablecoins at the moment is over 200 worldwide.

These currencies are used for the purchase of goods and services in world economies. Despite inflation, fluctuating exchange rates, and other factors, there are very few day-to-day changes in the value of almost all of these stable crypto coins. It enables many economies to depend on the application of the currencies provided by the government. Stablecoins — digital cash — are designed to imitate conventional, stable currencies.

A stablecoin is generally a cryptocurrency that is secured by the value of an underlying asset value. Many stablecoins are pegged to a 1:1-ratio of fiat currencies, such as the US dollar or the euro. Other stablecoins may be attached to other assets, such as gold or other cryptocurrencies.

Types of Stablecoins

After learning about what are stablecoins, the next step is to familiarize yourself with the types of stablecoins. There are three main types of stablecoins that you should know about;

Types of Stablecoins

Fiat-backed Stablecoins

This type is the most common and most straightforward stable cryptocurrency that is collateralized or backed by fiat currency like USD, EUR, or GBP

Stable crypto coins supported by fiat have a 1:1 ratio backed, which means that one stablecoin is equivalent to 1 unit of currency (like a dollar).

The company that handles the stable cryptocurrency will take away the amount of fiat from its reserve and send it to the person’s bank account if someone wishes to redeem the cash with coins they own. The stablecoins equivalent is then destroyed or removed from circulation.

Crypto-backed Stablecoins

As the name suggests, they are stablecoins backed by other cryptocurrencies. It allows crypto-backed stablecoins to be much more decentralized than their reverse counterparts.

These stable cryptocurrencies are often over-collateralized to reduce market volatility risks to absorb price fluctuations of collateral. If the cryptocurrency price falls low enough, the stable crypto coins are liquidated immediately.

Decentralized crypto-collateralized stablecoins make it possible to build confident, secure and transparent processes. There is no single entity that controls your money. Also, they are supported to spread risk through multiple cryptocurrencies.

They also enjoy more liquidity, which means that they can become their underlying asset quickly and cheaply.

Algorithmic Stablecoins

Uncollateralized stablecoins are not supported by anything. That may seem inconsistent in terms of what stablecoins are. The US dollar once was supported by gold, but it ended ten years ago, and dollars remain stable because people believe in its worth. For uncollateralized stable coins, the same concept can be applied.

These stable crypto coins utilize a stablecoin supply control system controlled by algorithms, a model known as seigniorage shares.

With rising demand, the price will be reduced back to normal levels by new stablecoins. If the coin trades too low, coins are purchased on the market to reduce the flow. In principle, these stablecoins’ prices will remain stable as guided by supply and demand on the market.

What Can We Do With Stablecoins? 

As mentioned under what is a stablecoin, you might want to understand how stablecoins work and how to make money with stablecoins. Firstly, they are used as a store and as a platform for exchanges as many digital currencies. They temporarily relieve traders from uncertainty if the market falls apart and can also be used for farming, lending, and liquidity in the rapidly expanding world of decentralized finance (DeFi).  

The majority of traders and investors gain stablecoins when they buy them on exchange platforms, but often by depositing the collateral with the issuer, such as US dollars with Tethers or actual gold with CACHE gold, it is frequently possible to mint fresh stablecoins.

How to Earn More Stablecoins

Knowing how stablecoins work, earning more of them is a walk in the park. Many centralized and decentralized (DeFi) financial platforms provide a certain level of interest when you store digital currencies (like Bitcoin) and stablecoins (like Dai).

DeFi platforms allow people to borrow from others, trade cryptocurrency with accounts that imitate traditional savings, and more. They are not owned or managed by a bank.

As with a bank’s traditional interest-carrying account, you can retrieve your crypto assets if you wish, with any interest you have earned.

Real-world Applications 

Stablecoins have a lot of potential in today’s economy and day-to-day lives. 

Streamlining Recurring and P2P payments

Stablecoins enable the use of smart financial contracts. Smart contracts are self-executing contracts on a blockchain network without a third party or central authority to validate them. These automated transactions are traceable, transparent, and non-transparent and are suitable for purchases, rent, and subscriptions for wages and loans.

For instance, an employer may create a smart contract at the end of each month that automatically transfers stable crypto coins to its workers. It is particularly advantageous to companies with workers around the world since the process of moving and exchanging fiat currencies from, say, a New York bank account to a Chinese banking account is usually costly. 

This process could take only minutes with stablecoins and require only a tiny fraction of the average transaction charges.

Mainstream Trade

Stablecoins may also be used for mainstream trade like any other currency, but with the added benefits of being a legally backed, stable digital currency.

Crypto stablecoins are also particularly useful for overseas payments since you don’t need to convert various fiat currencies. In addition to various digital operations, such as alternative borrowing for unable or qualified loans to obtain loans from a bank. Stablecoins have potential as a worldwide medium for e-commerce exchange. 

Fast and Affordable Remittances 

As the global transfer market is valued at approximately $800B, this is a significant case of use for stablecoins, according to the CB Insights’ Industry Analyst Consensus.

Migrant workers have to send money back to their families and loved ones through companies such as Western Union. It is a lengthy and expensive development in which families lose a massive portion of their money at high fees. To solve this problem, employees and their families worldwide may take digital wallets nearly instantaneously, at low charges, without price fluctuations, to obtain stablecoins.

Protection from Market Volatility

Stablecoins could protect against global uncertainty in the market. The volatility of the economic crisis in Covid 19, among other things, led the demand for digital assets to stabilize, particularly given the significant declines in volatile cryptocurrencies such as Bitcoin due to the initial lockdowns. In 2020 alone, the value of all released stablecoins increased by 300 percent.

What Can We Do With Stablecoins Using CoinRabbit?

CoinRabbit is a website that allows users to quickly and securely borrow cryptos and stablecoins. You can get Tether for a Bitcoin loan on CoinRabbit’s cryptocurrency lending service – carry some BTC and get USDT at a 5% interest rate you don’t even need to pay monthly. The Crypto-Lending program allows you to without investment to make the most of your Bitcoin and Ethereum. 

It’s a lot easier to borrow money from CoinRabbit. The typical loan and collateral refund period are just 5-10 minutes. You can loan 5 percent APR in stablecoins for an infinite period, and you won’t have to sell your cryptos. On the website, users can measure the amount of loan they can use of various collateral options and confirm the loan using their phone number and payment address.

How We are Able to Offer Such High Rates and Terms on Stablecoins?

CoinRabbit, first of all, complies with all rules in the cryptographic space. The risk management system from ChangeNOW helps them combat money laundering by freezing malicious transactions.

The platform also takes full advantage of stablecoins to conduct business every day and provide the CoinRabbit group with high returns. In the event of something going south, their assets are also backed and insured.

Post Author: CoinRabbit.io