Stablecoins have become an important part of the cryptocurrency landscape. By reducing volatility, stablecoins open up new possibilities for decentralized finance and global transactions.

Join in this article as we explore what stablecoins are, how stablecoins work, their examples, and why they are important for the future of digital finance. A stablecoin is a type of cryptocurrency that aims to maintain a stable price relative to another asset, such as the euro, US dollar, or gold.

They achieve this stability through various mechanisms, such as asset backing or algorithmic controls. By reducing volatility, stablecoins enable secure crypto payments, remittances, and uses within decentralized finance that would be impractical with highly volatile crypto assets.

How do stablecoins work?

There are a few main ways that stablecoins maintain price stability:

Fiat backing

As mentioned, most stablecoins like EURK have reserves of fiat currencies held in bank accounts, enabling token redemption for an equivalent amount of dollars, euros, etc. This gives stablecoins an intrinsic value that matches the backing asset.

EURK is an audited euro stablecoin that offers transparency with multiple reserves in Switzerland and the Dominican Republic. Cryptobunq, a secure one-stop-shop crypto service provider, issues and audits EURK.

Cryptocurrency collateralization

Some stablecoins instead use cryptocurrencies like Bitcoin or Ethereum as collateral. For example, MakerDAO's DAI token requires locking crypto collateral into a smart contract to mint new DAI tokens. If the DAI price deviates from $1, the system makes adjustments.

Algorithmic stability

A few experimental stablecoins maintain pegs through an algorithm involving two tokens. Users could swap the stablecoin for the other crypto token if prices moved, thus incentivizing stability.

What is the point of a stablecoin?

The role of stablecoins is that they aim to provide crypto traders, investors, and regular users with the stability of fiat currencies alongside the ease, speed, and programmability of cryptocurrencies.

Some key benefits of stablecoins include:

Price stability

Unlike crypto coins, stablecoins try to avoid volatility so their value isn’t wavering constantly. This makes them useful for payments, savings, and more complex financial applications like crypto lending.

Borderless payments

Stablecoins can facilitate cross-border value transfers quickly and cheaply without relying on traditional banking rails, which can take days and include high fees. You can check "cross-border payments," “global payments," and “e-commerce payments” for more details about the benefits of stablecoins.

DeFi applications

Stablecoins form the base currency for much of the decentralized finance (DeFi) sector, allowing applications like lending, borrowing, savings, and more to function smoothly.

Currency hedging

Holding assets like EURK in a crypto wallet protects users in countries with unstable national currencies or high inflation from economic issues.

Why are stablecoins so important?

With the emergence of cryptocurrencies as an alternative financial rail and the rise of decentralized finance, stablecoins have taken on increasing importance in both crypto and traditional finance in recent years.

Here are the reasons why stablecoins are so important:

Daily crypto trading volumes

Stablecoins now comprise over 80% of daily crypto trading volume, according to some estimates, highlighting their use as a bridge between fiat and speculative digital assets.

DeFi growth

Stablecoins dominate decentralized applications, with over $180 billion in total value locked in DeFi protocols as of January 2023. This sector would struggle without price-stable digital assets.

Banking the unbanked

Providing banking services to those without access to traditional banking. An estimated 1.7 billion adults worldwide lack access to traditional banking but do have smartphones. Stablecoins could help fill this gap by allowing secure digital savings and payments.

Institutional investment in crypto

There is a growing trend of institutional investment in the crypto market. Pension funds, asset managers, and other large investors seeking crypto exposure often prefer the low volatility of regulated stablecoins over raw cryptocurrencies.

With their potential to bank the unbanked, fuel continued growth in DeFi, and enable greater institutional crypto investment, stablecoins will likely remain a driving force in digital finance going forward. The power of stablecoins is undeniable in the crypto ecosystem.

What kinds of stablecoins are there?

There are three main categories of stablecoins:

Fiat-backed stablecoins

As we discussed earlier, fiat currency reserves collateralize these assets at a 1:1 ratio. EURK is an example of a stablecoin that collateralized its assets at a 1:1 ratio with euro reserves.

Cryptocurrency-backed stablecoins

These derive stability via the collateralization of crypto assets through smart contracts.

Algorithmic stablecoins

These stablecoins rely solely on complex algorithms and incentive mechanisms, rather than reserves. However, algorithms present challenges around long-term stability.

Among these, fiat-backed stablecoins have proven most resilient while also providing transparency through audits of bank reserves.

But collateral-backed models are seen as preferable too. The future lies in improving existing fiat/collateral models while minimizing the risks inherent to algorithmic approaches.

What is the distinction between EURK and other stablecoins?

While most major stablecoins are dollar-focused, EURK stands out with its euro denomination and focuses on transparency through banking reserves. EURK offers both transparency for stablecoin and liquidity in stablecoins at the same time.

Key differences include:

Currency

The euro directly influences the stability of EURK and it is a powerful currency in global economy.

Reserves

EURK holds reserves in multiple jurisdictions, like Switzerland and the Dominican Republic, for added security compared to centralized models.

Audits

CBQ regularly audits EURK's reserves, instilling confidence that is absent in other stablecoins with undisclosed backing assets.

Tech partner

EURK gains credibility compared to anonymously operated competitors because Cryptobunq, a crypto-friendly digital bank, issues it through a regulated partner.

Overall, EURK stablecoin combines the advantages of stability, transparency, and geographic relevance that set it apart in the increasingly competitive stablecoin market. It can be a compelling euro-pegged alternative for those wishing to integrate stable digital assets.

If you have hesitations, you can check “Are stablecoins a good investment?" “How profitable are stablecoins?" “Can you store stablecoin on the ledger?" and “Why should you invest in euro-based stablecoins?”.

The bottom line

Stablecoins have revolutionized the role that cryptocurrencies can play in both traditional finance and decentralized finance applications. They have become an important part of the cryptocurrency landscape as they enable new opportunities for people to invest in stablecoins and dApps.

With stablecoins reducing volatility, users are able to buy EURK and make global transactions with more practical stability compared to highly volatile crypto assets. Through EURK, Cryptobunq offers a secure euro stablecoin that provides the stability of fiat alongside the benefits of blockchain.

With their ability to bank the unbanked, fuel further DeFi growth, and attract wider institutional adoption, stablecoins like EURK will likely remain a driving force in digital finance for the coming years.

Join the euro stablecoin ecosystem and benefit your individual and business projects with EURK through CBQ. As Cryptobunq, we offer many expert crypto services alongside EURK, from exchange APIs to custody and wallet solutions. Contact us and integrate crypto services into your business today!