Skip links

What Is A Stablecoin? Heres Where And How To Buy Them

what is a stablecoin

Whether or not Tether continues to be truthful about its reserves is a subject of controversy. Tether continues to refute “misconceptions” about Tether and USDT amid ongoing regulator scrutiny. There’s also Tether Gold (XAUt) and PAX Gold (PAXG), which operate in a similar way, but are instead pegged to one troy ounce of investment-grade gold. TerraUSD now trades under TerraClassicUSD (USTC) since the Terra blockchain was officially halted and de-pegged from the U.S. dollar on May 9. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

what is a stablecoin

These assets are less stable than fiat-backed stablecoins, and it is a good idea to keep tabs on how the underlying crypto asset behind your stablecoin is performing. One crypto-backed stablecoin is dai, which is pegged to the U.S. dollar and runs on the Ethereum blockchain. Stablecoins also can anchor crypto trading and protect investors during volatile markets. In a bear market, traders can flip their Bitcoin, Ethereum, or other crypto assets to stablecoin in a split second. Enters into Strategic Agreement with BTG Pactual

Binance USD (BUSD) is the third largest stablecoin by market cap and is pegged to the dollar on a one-to-one basis. According to its partner developers, Binance and Paxos, BUSD is 100% backed by an “equal amount” of U.S. dollars and treasury bills. Stablecoins are neither issued nor regulated by a central bank or government.

These stablecoins always require over-collateralised deposits in order to ensure that fluctuations in value of the underlying collateral won’t break the peg. Working examples of this approach include Tether, Gemini, Paxos, and TrueUSD (pegged to the US dollar), Digix (backed by gold), and Globcoin (based on a basket of currencies). Borrowing elements of Stablecoin design, several countries, through their central banks, are planning to create  digital versions of their currencies called Central Bank Digital Currencies. This stable cryptocurrency can be found in most major crypto exchanges. Traders can take advantage of arbitrage when the crypto prices differ on two exchanges. Launched in 2014, the largest stablecoin by market capitalization is Tether USDT.

How We Make Money

Etheruem’s dominance underscores its robust infrastructure supporting First Digital USD transactions and liquidity. The purpose of a stablecoin goes beyond being just a financial contract. It is the evolution of both conventional payment systems and traditional, volatile cryptocurrencies.

  • You may obtain access to such products and services on the App.
  • In this article, we will take a deep-dive into what stablecoins are, their importance, benefits in the crypto space and the popular stablecoins available on the market.
  • The idea is that, unlike cryptocurrencies like Bitcoin, stablecoins’ prices remain steady, in accordance with whichever fiat currency backs them.
  • Off-chain collateral means the assets are kept in reserve outside of the blockchain by a bank or financial institution.
  • Ideally, a digital asset should have low inflation to maintain its purchasing power.

While at first Ether was the only cryptocurrency accepted as collateral, later iterations implemented a multi-collateral approach – meaning you can deposit many other Ethereum-based tokens as collateral. The first and most prominent example of a crypto collateral-based stablecoin is DAI, the brainchild of crypto non-profit MakerDAO. The first and still the biggest stablecoin by market cap today is Tether (USDT), launched in 2014. In line with the Trust Project guidelines, the educational content on this website is offered in good faith and for general information purposes only.

Algorithmic Stablecoins

These specific Stablecoins allow holders to participate in the gold market and have the utility benefits of a cryptocurrency without the challenges of physically owning gold bars. In this setting, the trust in the custodian of the backing asset is crucial for the stability of the stablecoin’s price. If the issuer of the stablecoin does not actually possess the fiat necessary to make exchanges, the stablecoin can quickly lose value and become worthless. However, in practice, few, if any, stablecoins meet these assumptions. TerraUSD’s price was pegged at $1 via the minting (creation) and burning (destruction) of a sister coin, Luna.

what is a stablecoin

If the price surpasses the value of the fiat currency, new tokens enter into circulation to reduce the stablecoin’s value. A fiat-backed stablecoin keeps a fiat currency, such as USD or GBP, in reserves. Users can then convert their fiat to a stablecoin and vice versa at the pegged rate. Before, crypto investors and traders had no way to lock in a profit or avoid volatility without converting crypto back into fiat. The creation of stablecoins provided a simple solution to these issues. Today, you can easily get in and out of crypto volatility using stablecoins like TrueUSD (TUSD).

Leave a comment