Stablecoin 101: Definition, Collateral, How They Work

In May 2022, the meltdown of TerraUSD showed that not every stablecoin can guarantee price stability. The following graph shows the price of bitcoin vs. the U.S. dollar (USD) compared to another fiat currency, the Canadian dollar (CAD), to see how much each currency fluctuates in relation. SUSD is a new decentralized stablecoin allowing 0% interest borrowing against Solana (SOL). Save wrote that it hopes the stablecoin’s deep integration into its protocol will lead to its rapid growth. All opinions expressed and data provided are subject to change without notice.

Is Ethereum a stablecoin?

1. Exchanges like Coinbase may offer some stablecoins, but such centralized exchanges may list fiat-backed versions only.
2. Launched in September 2019, BUSD is independently managed by Paxos and its monthly audits are available on its website.
3. Fiat is the government-issued currency we’re all used to using on a day-to-day basis, such as dollars or euros.
4. DAI is over-collateralized to deal with the volatility of crypto, and users enter into Collateralized Debt Positions (CDPs) that manage their collateral.

At the time of writing, a total of 55.8 billion USD Coins are in global circulation. A stablecoin is a cryptocurrency whose value is pegged to the price of another asset, hence the term “stable.” For example, if functioning correctly a stablecoin pegged to the U.S. https://cryptolisting.org/ dollar should always be valued at $1. However, in practice, few, if any, stablecoins meet these assumptions. In some ways, that’s not so different from central banks, which also don’t rely on a reserve asset to keep the value of the currency they issue stable.

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And stablecoin issuers may share some details about what and where they’re holding their reserves. There are also stablecoins that are pegged to a commodity, such as gold or oil, but fiat-pegged stablecoins how to calculate the future value of an investment are currently the most popular options. As the name suggests, USD Coin ties to the value of the US dollar. This means one can buy one USDC for $1 or redeem one USDC for $1 at any given time.

Why Are Stablecoins Important to Cryptocurrency?

A third variety of stablecoin, known as an algorithmic stablecoin, isn’t collateralized at all; instead, coins are either burned or created to keep the coin’s value in line with the target price. Let’s say the stablecoin drops from the target price of $1 to $0.75. The algorithm will automatically burn a tranche of coins to introduce more scarcity, pushing up the price of the stablecoin. This type of stablecoin protocol is difficult to get right and has been tried and has failed several times over recent years. Algorithmic stablecoin issuers can’t fall back on such advantages in a crisis.

Collateralized stablecoins maintain a pool of collateral to support the coin’s value. Whenever the holder of a stablecoin wishes to cash out their tokens, an equal amount of the collateralizing assets is taken from the reserves. The value of stablecoins of this type is based on the value of the backing currency, which is held by a third party–regulated financial entity.

Additionally, the company has yet to default on any redemption request. Here’s a general guide to understanding the different stablecoins available on the market today. USD Coin openly has a back door to stop payments if coins are used in an illicit manner.

A stablecoin is a type of cryptocurrency that is designed to maintain a stable value relative to a specific asset. This stability is usually achieved by pegging the stablecoin’s value to a reserve of assets. For example, if a stablecoin is pegged to the US dollar, the issuer of the stablecoin holds an equivalent amount of dollars in reserve.

It marks the first time a major financial company is issuing its own regulated stablecoin, leading many newcomers to crypto wondering what a stablecoin is and why they are used. To serve as a medium of exchange, a currency that’s not legal tender must remain relatively stable, assuring those who accept it that it will retain purchasing power in the short term. Among traditional fiat currencies, daily moves of even 1% in forex trading are relatively rare. All this volatility can be great for traders, but it turns routine transactions like purchases into risky speculation for the buyer and seller. Investors holding cryptocurrencies for long-term appreciation don’t want to become famous for paying 10,000 Bitcoins for two pizzas. Meanwhile, most merchants don’t want to end up taking a loss if the price of a cryptocurrency plunges after they get paid in it.

At the time of writing, USDT is the third biggest cryptocurrency by market capitalization, behind just Bitcoin and Ethereum. However, Tether has been plagued by doubts due to a lack of transparency around its actual reserve holdings. Fiat-backed stablecoins are described as an IOU — you use your dollars (or other fiat currency) to buy stablecoins that you can redeem later for your original currency. Unlike other cryptos, with value that can fluctuate wildly, fiat-backed stablecoins aim to have very small price fluctuations. But that’s not to say stablecoins are a totally safe bet — they are still relatively new with a limited track record and unknown risks, and should be invested in with caution. The cryptocurrency exchange Coinbase offers a fiat-backed stablecoin called USD coin, which can be exchanged on a 1-to-1 ratio for one U.S. dollar.

Precious metal-backed stablecoins use gold and other precious metals to help maintain their value. These stablecoins are centralized, which parts of the crypto community may see as a drawback, but it also protects them from crypto volatility. Gold has long been seen as a hedge against stock market volatility and inflation, making it an attractive addition to portfolios in fluctuating markets. Digix is a stablecoin backed by gold that gives investors the ability to invest in the precious metal without the difficulties of transporting and storing it.