Stablecoins are digital currencies that are pegged to the value of another asset.
The most common way to create a stablecoin is through the use of blockchain technology and smart contracts.
In this article, we’ll explain what stablecoins are and why they’re important in our future era of decentralization.
We’ll also cover how they work and why you should consider investing in them if you’re interested in cryptocurrency investing!
What Are Stablecoins?
Stablecoins are cryptocurrencies that are designed to be less volatile than Bitcoin and other cryptocurrencies. They maintain a stable exchange rate with the US dollar, which means they can be used as a hedge against the volatility of cryptocurrency markets.
They can also be known as fiat-backed cryptocurrencies (FBAs).
FBAs provide traders with an alternative way to hedge their cryptocurrency holdings against price fluctuations in crypto markets by using a central financial institution like Goldman Sachs.
The Basics of Stablecoins
A stablecoin is a type of cryptocurrency that’s meant to be stable in value. It’s backed by fiat currency, like dollars or yen, and it can be used for commerce and investment.
Stablecoins were first introduced in 2011 with Tether (USDT), which is currently the largest stablecoin with a market cap of $1.9 billion.
Tether provides a way for investors to buy into cryptocurrencies without having to hold their own private keys or deal with mining fees associated with other cryptocurrencies like Bitcoin Cash (BCH) or Ethereum Classic (ETC).
Some of the most popular stablecoins today are the USD Coin (USDC) token and BinanceUSD (BUSD).
These two projects have raised more than $200 million combined through initial coin offerings (ICO) campaigns this year alone–an indication that there’s strong demand among investors looking for ways to safely store or invest in digital assets while keeping control over their funds at all times
Key facts about Stablecoins
- Stablecoins are digital assets that aim to maintain stability in value by linking it to a reference point such as a currency or commodity.
- They are considered more reliable than traditional cryptocurrencies as they provide a more steady option for transactions.
- The value of stablecoins can be linked to the U.S. dollar or the price of commodities such as gold.
- Stability is maintained by holding reserve assets as collateral or through algorithms that regulate the supply.
How Do Stablecoins Work?
Stablecoins are backed by assets that are either real or tangible. The most common stablecoins are pegged to fiat currencies, but some also work with precious metals and other cryptocurrencies.
For example, Tether (USDT) is backed by US dollars on a 1:1 basis, so if you hold one USDT token you own one US dollar.
However, this isn’t always the case–some stablecoins offer more flexible terms than others.
For instance, MakerDAO’s Dai coin is collateralized against collateralized debt obligations (CDOs), which means that it can be redeemed for USD at any time without affecting its value.
CDO investors are compensated through the interest and dividends they receive as a result of holding that investment.
Why Invest in Stablecoins?
The most obvious reason to invest in stablecoins is that they are a great way to diversify your portfolio.
This is because stablecoins have proven themselves as a safe haven for investors, who can use them as an alternative to traditional currencies like the US dollar or the euro.
The second reason is that there is high demand for stablecoins–they’re not only popular among investors but also with merchants who accept them as payment methods (think of places like Amazon).
This means that it’s unlikely you’ll find yourself out-of-pocket if you want to use one of these currencies today or tomorrow.
However, it is likely if one stablecoin fails or becomes inflated beyond reason, this could cause all other types of stablecoins to plummet in value.
Why Are Stablecoins Important?
There are many reasons why stablecoins are important. They can be used for trading, payments, and commerce, but they also have a number of other uses.
For example, stablecoins can be used as a way to invest in real estate or other assets that may fluctuate in value.
In addition, they allow people who don’t have access to traditional banking services access to financial products that were previously only available through banks (like loans).
This is a game changer, especially for third-world or war-stricken countries.
Not only do they have access to bank-like services, but they may also have the opportunity to preserve the value of their cash if inflation goes out of control.
For instance, in Sri Lanka when their government collapsed, some smart crypto users managed to convert their cash to stablecoins which in turn helped preserve the value of their holdings in USD.
Types of Stablecoins
Stablecoins are digital assets designed to maintain a stable value, usually pegged to the value of a real-world asset like a currency or commodity. There are several types of stablecoins, each backed by different assets.
- Commodity-backed stablecoins
These stablecoins are supported by hard assets like gold or real estate. The most common asset used is gold, but some also use a combination of precious metals.
- Fiat-backed stablecoins
These stablecoins are backed by fiat currencies like the Chinese yuan. The currency is kept as collateral in a reserve and is managed by an independent custodian who is regularly audited to ensure compliance. Most fiat-backed stablecoins are backed by dollar reserves.
- Crypto-backed stablecoins
These stablecoins are backed by other cryptocurrencies. To counteract the higher volatility of the underlying assets, the stablecoin often maintains an overcollateralized position. This means that even if the value of the backing assets decreases, the stablecoin will still hold its intended value.
- Seigniorage-style stablecoins
These stablecoins are backed by algorithms or processes rather than an asset or currency. The concept of seigniorage as backing came from a whitepaper by Robert Sams, who proposed the idea of a “Federal Reserve coin.” These stablecoins are governed by smart contracts on decentralized platforms.
Top Stablecoins You Should Know About
- Tether (USDT)
Tether (USDT) is a stablecoin tied to the value of the US dollar, known for its security and smooth integration with crypto-fiat platforms but considered risky due to past controversies.
- USD Coin (USDC)
USD Coin (USDC) is a stablecoin backed by Coinbase, the largest bitcoin broker.
- Binance USD (BUSD)
Binance USD (BUSD) is a stablecoin pegged to the US dollar, operating on the Binance Smart Chain network.
- True USD (TUSD)
True USD (TUSD) is a liquid stablecoin 100% backed by the US dollar and offered by TrustToken, who also offers stablecoins tied to other major currencies.
- Origin Dollar (OUSD)
Origin Dollar (OUSD) is a stablecoin backed by several top stablecoins for diversified risk and with the ability to earn interest directly from the wallet.
- Paxos Standard (PAX)
Paxos Standard (PAX) is a stablecoin aimed at maintaining 1:1 parity with the US dollar, created in response to controversy surrounding Tether.
Final Thoughts on Stablecoins
Stablecoins are an exciting new development in the cryptocurrency market.
They’re a way for investors to get exposure to these new stablecoins without having to deal with volatility or price swings.