Stablecoin 101: Definition, Collateral, How They Work
We believe everyone should be able to make financial decisions with confidence. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances.
Algorithmic Stablecoins
Unlike Ethereum, stablecoins aim to maintain a stable value and are often pegged to a stable asset like the US dollar. Crypto-backed stablecoins are cryptocurrencies that use one or more cryptocurrencies as collateral to provide their stability. These stablecoins use a mix of smart contracts on the blockchain to lock in cryptocurrency reserves instead of relying on a central financial institution to hold reserves like fiat-backed cryptocurrencies.
It’s a Good Year for Stock-Pickers. Here’s Why
Crypto’s total market capitalization can rise and fall by billions of dollars a day. Even the top cryptocurrency—Bitcoin (BTC)—is subject to significant fluctuations in value. Over the past month, investors have seen around a 4% daily change in the value of BTC. Tether (USDT) is one of the oldest stablecoins, launched in 2014, and is the most popular to this day. It’s one of the most valuable cryptocurrencies overall by market capitalization. Stablecoins aim to provide an alternative to the high volatility of popular cryptocurrencies, which can make cryptocurrency less suitable for common transactions.
How do stablecoins work, and how many types are there?
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. This means that for every stablecoin issued, there is a real dollar backing it, which helps to maintain its price stability. Stablecoins are used as a hedge against the volatility of other cryptocurrencies, as a means of exchange, and also as a way to store value. They seek to provide fiat value and price stability in a blockchain environment where digitized (yet non-decentralized) cash may not be recognized.
Stablecoins, and cryptocurrencies, are now under increased scrutiny by federal regulators. What makes DAI different is that anyone can issue it (unlike centralized stables like USDT and USDC) since the MakerDAO is open-source and on the highly decentralized Ethereum blockchain. Minting and burning DAI occurs when users borrow funds and then repay their loans. In the worst-case scenario, it’s possible the reserves backing a stablecoin could turn out to be insufficient to redeem every unit, potentially shaking confidence in the coin. Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market Barometer) quotes are real-time. DUBAI, UAE, June 24, 2024 /PRNewswire/ — Bybit, one of the world’s top three crypto exchanges by volume, has released its Q2 Asset Allocation report, which covers the period from December 2023 to May 2024.
Fiat-Collateralized Stablecoins
- Proponents argue this combination makes stablecoins particularly useful as they act as a kind of bridge between traditional assets and the crypto economy.
- «Apart from being tied to another asset, collateralization also includes the buying and selling of affiliated assets through algorithmic mechanisms.»
- There has been an increasing number of players coming into the stablecoin market, yet the competitive advantages of the players remain limited (only a small differentiation in collateral backing, yield offerings, etc.).
- However, in practice, few, if any, stablecoins meet these assumptions.
- As they are designed to maintain a stable price, they are useful for reasons other than speculation.
- The main idea is to have a cryptocurrency that is not subject to the volatility of other cryptos like Bitcoin and the many hundreds of altcoins.
Such reserves are maintained by independent custodians and are regularly audited, something that should be considered cautiously. Tether (USDT) and TrueUSD (TUSD) are popular stablecoins backed by U.S. dollar reserves and denominated at parity to the dollar. As of late June 2024, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $112 billion. Stablecoins are defined as cryptocurrencies https://www.tokenexus.com/ whose value is tied to an asset class, such as fiat currencies, real-world assets (RWAs), and other crypto assets. Issuers normally keep a reserve to store the assets backing the stablecoin in order to maintain the stability of the peg. In other words, the reserve is collateral, and whenever stablecoins are created or redeemed, assets in the reserve are theoretically added or taken out accordingly.
- Already in recent months, several credit institutions have moved to offer their own stablecoin, such as Société Générale with the launch of EURCV.
- SoFi does not guarantee or endorse the products, information or recommendations provided in any third party website.
- The likes of USDC and USDT are widely accepted and can be bought and sold on most cryptocurrency exchanges.
- Typical examples include selling governance tokens that allow buyers to gain voting control over the stablecoin’s future or locking up funds into smart contracts on the blockchain to earn interest.
Comentarios recientes