What are stablecoins?
Crypto for Beginners
A stablecoin is a cryptocurrency whose value is tied to another asset class, such as a fiat currency or gold, to keep its value stable. Cryptocurrencies like bitcoin and ether have a variety of advantages, one of which is that they do not require confidence in a third party to transmit payments, making them accessible to people all over the world. However, one significant disadvantage is that cryptocurrency values are volatile and vary rapidly. This makes them difficult to utilize by regular people. People, in general, demand to know how much their money is worth in a week's time, both for their security and their livelihood.
The volatility of cryptocurrency contrasts with the relatively constant pricing of conventional money like US dollars or other assets like gold. Currency values, such as the dollar, fluctuate over time, but cryptocurrencies, which increase and decrease in value daily, have more dramatic fluctuations. Stablecoin attempt to mitigate price volatility by connecting the value of cryptocurrencies to more stable assets, such as fiat currencies. Fiat currency, such as dollars or euros, is a government-issued currency that we're all used to utilizing daily and are called fiat currencies.
Typically, the entity behind a stablecoin will set up a "reserve" where the asset or basket of assets supporting the stablecoin is securely stored. The most popular types of stablecoin collateral:
- Fiat: The most prevalent kind of collateral for stablecoins is fiat. The most common fiat currency is the US dollar, but corporations are also looking into stablecoins tied to other fiat currencies, such as BiLira, which is fixed to the Turkish lira.
- Precious metals: The value of several cryptocurrencies is linked to the price of precious metals like gold or silver.
- Cryptocurrencies: Some stablecoins employ other cryptocurrencies as collateral, such as ether, the Ethereum network's native token.
- Other investments: Tether's USDT was previously meant to be backed 1:1 with dollars, but the company's collateral composition has evolved over time, with over half of its reserves in commercial paper, a type of short-term business debt, according to a breakdown published in 2021.
The most popular stablecoins are:
- Diem (previously known as Libra) is a stablecoin under development that was designed by Facebook, the world's most influential social networking site. Even though libra is yet to launch, it has had a greater psychological impact than any other stablecoin.
- Tether (USDT) is one of the oldest stablecoins, having been created in 2014 and still being the most popular. By market capitalization, it's one among the most valuable cryptocurrencies.
- USD Coin is a stablecoin that was launched in 2018 and is maintained by cryptocurrency corporations Circle and Coinbase under the Centre Consortium.
- Dai, a stablecoin on the Ethereum blockchain that runs on the MakerDAO protocol. Dai, which was founded in 2015, is a cryptocurrency that is tied to the US dollar and backed by ether, the Ethereum token.