What are stablecoins?
A stablecoin is a cryptocurrency that is designed to fluctuate as little as possible from a specific value. The most popular stablecoins use the U.S. dollar as a benchmark and maintain a price very close to $1 if they are functioning as intended. There are also stablecoins pegged to other currencies such as the euro or the Japanese yen, decentralized stablecoins that are pegged to the value of digital assets, and stablecoins that track the price of precious metals like gold and silver. The most popular stablecoin is Tether (USDT).
How do stablecoins work?
Most of the popular stablecoins maintain their price because they are backed with reserves of fiat currency and highly liquid financial assets such as bonds. In other words, the entity that is issuing the stablecoin guarantees 1:1 redemption of the stablecoin in exchange for the underlying currency, although this process usually comes with a fee.
There are exceptions, however – Multi-Collateral Dai (DAI), for example, uses a completely different model and maintains a price close to $1 by using a system of smart contracts and Ethereum (ETH) as collateral.
What are stablecoins used for?
The most popular use of stablecoins is to quickly switch between a volatile cryptocurrency and a more stable asset. For example, if a trader holds Bitcoin (BTC) and expects its price to fall, they can almost instantly trade their BTC for a stablecoin to protect their holdings.
Stablecoins also enable cryptocurrency exchanges that do not support fiat currency trading to list an asset with a relatively stable value.
Stablecoins provide the standard benefits of cryptocurrency without bringing price volatility into the picture. The idea of sending a stable currency worldwide on a 24/7 basis at a low cost holds a lot of promise, and there are multiple projects working on stablecoin adoption for uses beyond trading.
What are the benefits of stablecoins?
The main benefit of stable digital currencies is their ability to maintain price stability regardless of market conditions. Since stablecoin prices are supposed to remain constant at all times, cryptocurrency users can use stable coins to transfer value in the cryptocurrency market without incurring losses associated with the day-to-day price volatility of other digital assets, which are subject to constant supply and demand mechanics that lead to price volatility.
What are fiat-pegged stablecoins?
Fiat-pegged stablecoins are digital currencies that have their value pegged to the value of local currencies. The largest stablecoins in the sector, Tether (USDT) and USD Coin (USDC), are both examples of fiat-pegged stable coins. Generally speaking, fiat-pegged digital currencies account for the largest share of assets on the list of stable coins by market capitalization.
What are algorithmic stablecoins?
Algorithmic stablecoins–also referred to as decentralized stablecoins–are digital currencies designed to maintain their value via blockchain-powered arbitrage mechanisms. Algorithmic stablecoins are completely uncollateralized, meaning that their intended peg is controlled by an algorithm that adjusts their circulating supply–and subsequently price–rather than being backed by crypto or real-world assets.
Which are the top stablecoins by market cap?
For the better part of the past decade, the top spot on the list of stablecoins has been occupied by USDT. With the general growth trend of the overall stablecoin market capitalization over the years, several competitors to USDT have emerged – digital currencies like USD Coin (USDC), TrueUSD (TUSD), Binance USD (BUSD), and DAI are some of the top stable coins in the crypto market. For a detailed overview and blockchain characteristics of the largest stablecoins in the crypto market, click here.
Can you make money on stablecoins?
While stable coins don’t carry the inherent potential for value appreciation like the majority of other digital assets, they can be a lucrative investment vehicle, especially for users that prefer low-risk, stable returns over high-risk, high-rewards plays. Stablecoin owners can use their holdings to generate passive income streams via a number of different decentralized finance (DeFi) lending protocols and through centralized crypto savings options available on some of the largest centralized crypto exchanges, like Binance, for instance.
Where to buy stablecoins?
Stablecoins can be bought on virtually every major cryptocurrency exchange, including Bybit, Binance, Kraken, and KuCoin. Whereas all exchanges allow users to buy stablecoins in cryptocurrency trading pairs, some centralized platforms let investors purchase stablecoins directly with fiat.
Are stablecoins safe?
From a price volatility perspective, stablecoins are the safest asset type in the crypto market since they are designed to maintain price stability in order to allow cryptocurrency users a lossless transfer of value between blockchain-powered platforms. However, there have been times in the past when certain stablecoins failed to maintain their intended stablecoin peg. The most well-known instance of a large stable coin de-pegging came in May 2022, when TerraUSD (later renamed to USTC) failed to maintain its $1 peg.
Are stablecoins regulated?
Stablecoins regulation has been a hot topic ever since Meta (formerly Facebook) unveiled plans to launch its own stablecoin called Libra (later renamed as Diem) in 2019. While the social media giant’s stablecoin project was eventually shut down, it sparked a regulatory tsunami that led many countries to start creating legal frameworks designed to integrate stablecoins within existing financial structures. Countries like the US and the UK are arguably at the forefront of stablecoin regulation, with both nations actively pursuing banking-like legislation for large stablecoin issuers.
