Everything You Need to Know About Stablecoins

StableCoin - Finwatchers.com

Backed by a reserve asset, stablecoins offer stability on the market price. A stablecoin might be pegged to a currency like the US dollar, some other cryptocurrency or even a commodity like Gold. 

Bitcoin might be the most popular cryptocurrency, however, it struggles from high volatility in its valuations. Therefore, it makes Bitcoin and other such currencies unsuitable for daily use.

Any kind of currency should remain somewhat stable, be able to store some value, and also be used as a monetary exchange.

Stablecoins render their owners a stable purchasing power and the least possible inflation.

People often hesitate to own a currency if every other day the purchasing price changes drastically. 

Stablecoins encourage people to spend it instead of saving it.

Such assets act as entities to have best of both worlds and pave a center path between cryptocurrencies that do not have a third-party involvement between transactions but aren’t stable and Fiat Currencies that are stable but have government and banks as intermediaries.

The price stability in stablecoins is achieved through backing or collateralization or buying or selling of reference assets.

Types of Stablecoins

Stablecoins are categorized on the basis of their working mechanisms.

Fiat-Collateralized Stablecoins

To issue a certain number of crypto coins, fiat-collateralized stablecoins have a fiat currency reserve, similar to the U.S. dollar. fiat-collateralized stablecoins can also have other collateral reserves such as cold or any other precious commodity. 

Independent custodians regularly audit and maintain these reserves.

Crypto-collateralized stablecoins

Other crypto-currencies back crypto-collateralized stablecoins. Since the backed-up cryptocurrency also runs a risk of high volatility, therefore to issue a lower number of stablecoins, a reserve of stable cryptocurrency tokens is maintained.

Non-Collateralized (Algorithmic) Stablecoins

For retaining the stability, unlike fiat-collateralized, and crypto-collateralized, these stablecoins do not use reserves. Rather they use a working mechanism similar to what a central bank might use.

Five stablecoins and How are they backed up:

  • Tether (USDT): is a popular stablecoin that is backed by US dollar deposits and has a value equivalent to a single U.S. dollar and Tether is behind the issuance of the stablecoin.
  • MakerDAO's DAI (DAI/USD): is backed by Ethereum (ETH/USD) fixed against the US Dollar and allows it to have crypto assets as a reserve.
  • Basecoin: is pegged by dollar and uses a consensus mechanism to increase or decrease the supply of tokens.
  • USD Coin (USDC): is backed by an asset holding a value equivalent to the dollar and issues by Circle.
  • Binance USD (BUSD): is backed by the fiat currency US dollar and issued by the crypto exchange company Binance.
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This information is for educational purposes only and does not constitute investment advice. No person should rely on it to make any investment. Investing carries risks, including the loss of capital. All opinions expressed are subject to change without notice. Past performance is not indicative of future results. Always seek the advice of a licensed investment professional before making any investment.