What is Stablecoin?

What is Stablecoin?

Stablecoins are cryptocurrencies that use a variety of methods to keep their value fixed.

Stablecoins are cryptocurrencies designed to maintain the price stability of (strong) fiat currencies while maintaining the security, speed, and low cost of virtual asset transactions. This was initially done to minimize the impact of the price volatility of cryptocurrencies in trading and as a bridge to mainstream spending and financial institutions. Now they are beginning to branch out into mainstream banking to ease the cost and burdens of making payments.

There are four basic types of stablecoins. The three centralized stablecoins are backed by fiat currencies, commodities or cryptocurrencies, while decentralized ones rely on algorithms and smart contracts to automatically maintain value.

Are stablecoins controversial?

While bankers and authorities are seeing stablecoins as a very useful tool, the potential of some tokens to compete with national currencies makes regulators very wary.

The answer is, it depends on how it’s used and who’s using it. In June 2019, Facebook launched its Libra stablecoin project — since renamed Diem to ditch a toxic brand. The idea was to create a national currency-backed stablecoin that all of the social media network’s 2.3 billion members could use for payments.

What is a fiat-backed stablecoin?

A fiat-backed stablecoin keeps prices level by storing fiat backing each coin on a one-to-one basis.

The first and simplest stablecoin is fiat-backed, notably the U.S. dollar, as well as the euro, yen and others, at a one-to-one ratio. So long as the underlying currency — or basket of currencies as Libra originally proposed — stays stable, the stablecoin will maintain its value. They are, essentially, backed by the “full faith and credit” of the fiat issuer, with a value defended by that nation’s central bank.

Far and away the largest of these is Tether, with a market capitalization of $62.2 billion at this writing. But other leading stablecoins include Circle and Coinbase’s USD Coin ($23 billion), Binance USD ($9.6 billion), and DAI ($4.8 billion).

What is an asset-backed stablecoin?

An asset-backed stablecoin is similar to a fiat-backed one, except that it holds physical assets like gold.

Commodity-backed stablecoins replace fiat currencies with a variety of other tangible collaterals, notably the traditional store of value, gold. But others are backed by baskets of precious metals, even Swiss real estate. Generally, these stablecoins are linked to a specific amount of the commodity and stored in a known location and frequently subject to outside audits — something which fiat stablecoin Tether long avoided.

Created on 2nd Jul 2021