There are other considerations when it comes to choosing a stablecoin, the main one being availability. The likes of USDC and USDT are widely accepted and can be bought and sold on most cryptocurrency exchanges. A prime example is USD Coin, the parent company that holds U.S. dollar cash reserves equivalent to the total number of USD Coins in circulation. If it needs to mint another 1 million USDC, it will add $1 million to its cash holdings.
Why Are Stablecoins Needed?
- Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for everyday transactions.
- The information herein is general and educational in nature and should not be considered legal or tax advice.
- Asset-backed stablecoins might not actually hold enough assets to fully collateralize their outstanding coin balance.
- 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.
- Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.
So another way to think about stablecoins is as a tokenized version of a fiat currency. In theory, a U.S. dollar-based stablecoin is a token that will reside on a blockchain and always trade for one dollar. Cryptocurrencies worth $2 million might be held as a reserve to issue $1 million in a crypto-backed stablecoin, insuring against a 50% decline in the price of the reserve cryptocurrency. For example, MakerDAO’s Dai (DAI) stablecoin pegged to the U.S. dollar but is backed by Ethereum (ETH) and other cryptocurrencies worth about 155% of the DAI stablecoin in circulation. Crypto-collateralized stablecoins are backed by other cryptocurrencies. Because the reserve cryptocurrency may also be prone to high volatility, such stablecoins are generally overcollateralized—that is, the value of cryptocurrency held in reserves exceeds the value of the stablecoins issued.
How do stablecoins work?
Leading the stablecoin charge were Tether’s USDT and Circle’s USDC have seen a significant resurgence this year. With USDT making a surge to $118 billion, followed by USDC to $34.67 billion. The lack of stablecoin inflows points to weak investor confidence in Bitcoin’s short-term recovery. With Bitcoin recently falling below $58,000, the expected boost from stablecoin purchases is missing.
What Can You Do With Stablecoins?
Some people in the UK use stablecoins which are linked to the US dollar or other currencies. At the moment a small number of stablecoins are linked to the UK pound. Then the stablecoin is issued to the broader public through another type of infrastructure known as a ledger. With cryptoassets, what is a stablecoin like Bitcoin, their value tends to move up and down a lot in a short space of time. It is one reason why cryptoassets like Bitcoin are not widely used to pay for things. An example of a cross-border payment is when someone sends money to family or friends in another country.
The final primary type of stablecoin, which has attracted a lot of negative publicity lately, is the algorithmic stablecoin. Rather, they are designed to maintain their peg to an asset through complex algorithms that automatically control the token supply. Commodity-backed stablecoins are quite unique in that, while they’re designed to be stable, they can appreciate over time. It’s similar to someone who buys gold, hoping its value will increase later. Due to this, such stablecoins provide an incentive for long-term holders and users. They also provide an easier way for some people to invest in the commodities that back them.
- Traders like stablecoins because the cryptocurrency market fluctuates wildly, with its market capitalization rising and falling by billions of dollars daily.
- People can also decide to invest their stablecoins to make a return on them.
- Some people in the UK use stablecoins which are linked to the US dollar or other currencies.
- While this provides many opportunities for speculation, it does have drawbacks.
- Within a couple of days, the value of UST fell to just a few cents, while LUNA crashed to zero.
- We also want to make sure people can pay using stablecoins without disruption.
They give traders temporary reprieve from volatility when the market is tumbling, and can also be used in the rapidly growing world of decentralized finance (DeFi) for things like yield-farming, lending, and liquidity provision. Treasuries, YBS can offer greater stability than regular stablecoins relying purely on crypto-based collateral. This is particularly evident in Ondo Finance’s USDY, which provides yield from government-backed securities, ensuring a more stable and predictable return. Furthermore, platforms offering YBS, like Ondo Finance, ensure compliance with regulatory standards, making them accessible to a broader range of risk-averse investors. MakerDAO’s DAI stablecoin is an example of a token that does this with Ethereum.
- The coin is managed by the MakerDAO community that holds the governance token MKR.
- For instance, the stablecoin DAI is pegged to the USD (one DAI equals $1).
- Crypto’s total market capitalization can rise and fall by billions of dollars a day.
- The desire for stable assets on blockchains has resulted in the wide adoption of stablecoins within the blockchain industry and decentralized finance (DeFi).
- Others are skeptical, noting that they’ve played major roles in the collapse of several cryptocurrencies and crypto institutions.
