Stablecoin is a digital currency linked to a stable reserve asset such as the US dollar or gold. It is also regarded as a bridge between cryptocurrency and legal currency. Its main purpose is to ensure the price stability of traders when trading cryptocurrencies in fiat currency.

Although the high volatility of cryptocurrencies is conducive to traders' speculative trading, this type of trading is often accompanied by ultra-high risks, which discourages many long-term cryptocurrency investors. If you want to promote cryptocurrency as a medium of exchange, cryptocurrency prices must maintain relative stability, because only in this way can investors believe that digital currencies have purchasing power in the short term, and stablecoins were born.

All stablecoins are secured by some kind of reserve assets. These reserve assets can be US dollars, precious metals, real estate or other commodities. The way they work is that when stablecoin holders want to cash out their tokens, Assets of equal value will be extracted from the reserve assets behind these stablecoins.

Although digital currencies can currently be used for many commercial transactions, their high volatility has always been an obstacle, making stablecoins more practical than other digital currencies. Here are four main uses for stablecoins:

· The biggest use of stablecoins is that traders can use stablecoins to easily conduct cryptocurrency transactions, avoiding the transaction fees that traders incur when using legal currency to deposit funds.

· Stablecoins can be easily traded and stored without the need for a bank account, which is especially beneficial for areas where U.S. dollars are difficult to obtain or where the value of local legal currency is unstable.

· Stablecoin interest-earning fixed deposits can create additional income for traders, and the interest is usually higher than bank deposit interest.

· Stablecoin transfer fees are low and international remittances can be made quickly.

Although U.S. dollar stablecoins like Binance Stablecoin and USDC regularly publish their U.S. dollar reserves, these stablecoins are not subject to regulatory oversight by financial institutions. Stablecoin issuers may not have sufficient asset reserves, or may refuse to redeem tokens for reserve assets. Additionally, if stablecoin holders fear that their stablecoins will not be redeemed, they will quickly redeem them, leading to a massive sell-off of stablecoins. In order to meet the needs of holders, issuers of stablecoins must sell their reserve assets as soon as possible, which may cause the assets they hold to be sold at a low price, thereby affecting the stability of the entire financial system. At the same time, once the secured assets such as commercial paper held by the stablecoin issuer default, the stablecoin price may decouple from the US dollar.

Algorithmic stablecoins could lead to Ponzi schemes. Because new tokens can only be created by new users depositing collateral, and a Ponzi scheme is a scam that uses new investors’ funds to create returns for holders, once new users stop trading stablecoins, then the stablecoins The value will quickly shrink.

Since stablecoins have not yet been regulated by financial institutions, when these institutions are conducting illegal investigations such as money laundering and counter-terrorism financing, the issuers of stablecoins may freeze their tokens due to regulatory requirements, so the assets of stablecoin holders Possibly zero.

Many cryptocurrency exchanges provide stablecoin interest-earning services. In fact, just like bank deposits, stablecoin holders can choose a fixed deposit method, such as current or fixed term, and deposit a certain amount of stablecoins to the exchange. The exchange then lends these stablecoins to other users. At the end of the agreed period, users can withdraw their principal and the stablecoin interest accumulated during this period. It is worth noting that different cryptocurrency exchanges provide different stablecoin interest rates, so users need to do their research and choose an exchange with higher stablecoin interest rates.

Similar to stablecoin interest collection, stablecoin lending does not require depositing the stablecoins in the cryptocurrency exchange. You only need to borrow or lend the stablecoins to others on the cryptocurrency platform, which means that users need to bear their own risks. Although stablecoin holders may earn very high interest rates by lending in stablecoins, users need to do their research and carefully assess the risks.

Stablecoin staking is also a way to generate passive income. Staking is a way to validate transactions with cryptocurrency and allows participants to earn rewards for the cryptocurrency they hold. So, what is stablecoin staking?

Stablecoin staking is the process by which users use their own stablecoin assets to support the blockchain network and confirm transactions. First, stablecoin holders need to lock their stablecoins in a cryptocurrency wallet or smart contract. The locking period may vary from minutes to years, and wait for network selection. If you are selected and able to resolve correctly Math problems in the network to confirm transactions on the blockchain, then you will be rewarded. But assuming your answer is wrong, you may lose the stablecoins you locked up in the first place. Although stablecoin staking can give users ultra-high annual returns, risks such as the stablecoin lock-in period and the time for receiving rewards are not fixed are still worth noting.