Who will drive stablecoin innovation in 2024? PaymentsSource

what is a stablecoin

BTC and other cryptocurrencies are currently not able to offer the same level of stability and scalability for real-time transactions as compared to stablecoins. This is because the value of a stablecoin is (most often) pegged to another asset, such as gold, a fiat currency, or another crypto. The intention is that the value of a stablecoin is always equal to the asset it is pegged to.

what is a stablecoin

Crypto-backed

In this case, stablecoins are issued with cryptocurrencies as collateral instead of being backed by fiat currencies. The main idea here is to peg them to a basket of cryptos or a cryptocurrency portfolio. Since everything is done digitally on the blockchain, the system depends on the use of smart contracts to handle the issuance of units, ensure governance and establish trust. The stablecoin issuer ensures stability of their cryptocurrency by keeping fiat currency as collateral with a financial institution. The stablecoin always has a set amount of fiat currency in reserve that’s proportionate to the stablecoins it has issued. For example, if a stablecoin issuer has one million U.S. dollars in reserve, it might only offer one million stablecoins, each worth one U.S. dollar.

Why people choose stablecoins over cryptocurrencies like Bitcoin

You can mitigate risks by diversifying your portfolio, but make sure to do your own research before investing or trading, and don’t invest more than you can afford to lose. With the crypto boom of 2017 behind https://www.tokenexus.com/ us, investors are increasingly looking to stablecoins as a safer way to experiment with the technology. In the first half of 2020, the supply of stablecoins swelled by 94% to hit $11 billion in June.

  • In bridging TradFi and digital assets, stablecoins have become integral to the crypto ecosystem.
  • These stablecoins will issue new tokens when the price of stablecoins goes above the target price or above the fiat currency it is tracking.
  • However, Coinbase does not charge commission fees when UK customers buy or sell USDC1.
  • Collateral can be considered “on-chain”, like crypto collateral, or “off-chain”, like fiat or commodity collateral.
  • Some are actually backed by a reserve of the asset they represent; others use algorithms or other methods to keep their values from fluctuating too much.
  • A crypto-backed stablecoin operates just like a fiat-backed stablecoin.

According to Phillips, any “rational court” would see through the tactic. TrueUSD tokens are issued on the Bitcoin network via the Omni Protocol so that no one oversees the issuance of tokens. However, the tokens are based on the Ethereum network advanced issuance framework. USDC is currently issued on multiple blockchains but was introduced on the Ethereum blockchain in 2018. Rising gas fees on the Ethereum network pushed the need to launch the token on other networks with a relatively smaller fee.

Stablecoins bring more liquidity and volume to the crypto market

In fact one of the main of objectives of Central Banks like the Federal Reserve is to maintain price stability. 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. One of the risks of a stablecoin is that it can “depeg” from its collateral value. To be on the safe side, it’s best to stick with stable cryptocurrencies that are more well-known and have a high market cap. The stablecoin BUSD is a collaborative project between Paxos and Binance. It is backed by U.S. dollars which are kept in Paxos-owned bank accounts.

Therefore, the coin was issued on several networks, including Algorand, Solana, and Stellar. We explore in the Learn Crypto blog why governments see CBDCs as a way to retain control over money in a digital world. Two coins exist in this system, where one is a pegged coin and the other is a coin used to absorb the volatility of the pegged coin. Such fluctuations, or so-called ‘short-term volatility’, make cryptocurrencies unfavourable for everyday use by the general public. USD Coin became very popular since it provided an alternative to USDT as it provided proof of its backing by assets derived from the U.S. dollar. We believe everyone should be able to make financial decisions with confidence.

Maker DAI

Currently, stablecoin regulations are still up for discussion in most jurisdictions. Legislation to regulate stablecoin issuers is proposed but yet to be enacted. Leveraged loan stablecoins are backed by an over-collateralised system. The most successful example is DAI, which is collateralised by multiple stablecoins and cryptocurrencies.

  • Recall that the apex bank lifted the ban on cryptocurrency transactions in Nigeria in December last year.
  • Unlike an algorithmic stablecoin, commodity-backed stablecoins are collateralized by interchangeable assets, like precious metals.
  • If you’re looking to add some riskier assets to your portfolio, individual stocks can also fill that role.
  • Meanwhile, Standard Bank Group, Africa’s largest bank by assets, also partnered with Hedera in 2021.
  • Stablecoins are backed by a specified asset or basket of assets which they use to maintain a stable value against that asset.
  • The interest in stablecoins is that they are built to withstand volatility in a way that other cryptocurrencies aren’t, but still offer mobility and accessibility.

Stablecoins have caught regulators’ interest worldwide due to their unique mix of fiat and crypto. As they are designed to maintain a stable price, they are useful for reasons other than speculation. They can also facilitate high-speed transactions internationally at a low cost. Some countries are even experimenting with creating their own stablecoins. As a stablecoin is a type of cryptocurrency, it will likely fall under the same regulations as crypto in your local jurisdiction. Issuing stablecoins with fiat reserves may also need regulatory approval.

How do stablecoins work?

One of the main uses for stablecoins is as a reliable means of exchange. These coins can be traded just as any other coin and can be used as an intermediary between sending and receiving payments. This is great for both institutions as well as retail users of crypto since they can be sure the price will not alter between transactions.

  • For example, you can purchase tokens pegged to the dollar, euro, yen, and even gold and oil.
  • For instance, in November 2021, Senator Cynthia Lummis (R-Wyoming) called for regular audits of stablecoin issuers, while others back bank-like regulations for the sector.
  • One well-known algorithmic stablecoin is the TerraUSD (UST) which lost its peg in 2022.
  • Some people in the UK use stablecoins which are linked to the US dollar or other currencies.
  • The idea is that, unlike cryptocurrencies like Bitcoin, stablecoins’ prices remain steady, in accordance with whichever fiat currency backs them.

Stablecoins aim to solve this uncertainty, attempting to combine the stability of cash with the benefits of crypto technology. On one hand, they operate on blockchains, which supporters believe provide greater security, transparency, cost efficiency, and speed. On the other, they try to reflect the value of real-world assets like the US dollar. Proponents argue this combination makes stablecoins particularly useful as they act as a kind of bridge between traditional assets and the crypto economy. Stablecoins are an attempt to create a cryptocurrency token with a stable price.

What does it mean when a stablecoin “depegs”?

Stablecoins can also be used to quickly distribute monetary aid to beneficiaries worldwide, thanks to their high transaction speeds. The token was created what is a stablecoin to represent the price of one ounce of a gold bar. As such, customers receive the advantage of maintaining fractional ownership of the physical bars.

what is a stablecoin

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