Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. 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 common transactions. Instead of fiat currencies, however, they’re pegged to commodities—typically gold. For example, if Company https://www.tokenexus.com/what-is-atom-cosmos-crypto-review/ B has $10 billion of their stablecoin in circulation, they will need to hold $10 billion or more in gold in their reserves for the stablecoin to be usable. In the crypto economy, where transactions occur on a decentralized blockchain, digitized fiat cash—which is not a decentralized asset—may not be recognizable within the network. You need a cryptocurrency to facilitate transactions, but one that has the price stability of cash.
- Stablecoins can also be collateralized by other cryptocurrencies.
- Market capitalisation is the total number of tokens that exist multiplied by the value per token.
- Stablecoins are a type of Bitcoin alternative (altcoin) that is built to offer more stability than other cryptos.
- Crypto-collateralized stablecoins are backed by other cryptocurrencies.
- Stablecoins allow investors to move in and out of different cryptocurrencies while staying within the cryptocurrency realm.
- All this volatility can be great for traders, but it turns routine transactions like purchases into risky speculation for the buyer and seller.
- Their primary distinction is the strategy of keeping the stablecoin’s value stable by controlling its supply through an algorithm, essentially a computer program running a preset formula.
Seigniorage-style/algorithmic stablecoins (not backed)
Minting and burning DAI occurs when users borrow funds and then repay their loans. In Tether’s case, this has never been conclusively provided, sparking rumors that the currency was unbacked and was in fact minted what is a stablecoin out of thin air. You can borrow some stablecoins by using crypto as collateral, which you have to pay back. Stablecoins are a great method of payment for work and services because the value is stable.
What differentiates stablecoins from cash?
So you can swap any tokens you might have for a stablecoin you want. In this setting, the trust in the custodian of the backing asset is crucial for the stability of the stablecoin’s price. If the issuer of the stablecoin does not actually possess the fiat necessary to make exchanges, the stablecoin can quickly lose value and become worthless.
Algorithmic-based seigniorage Stablecoins
It was the first model to be used, and it’s by far and large the most prevalent today. I’m a technical writer and marketer who has been in crypto since 2017. Sign up for free online courses covering the most important core topics in the crypto universe and earn your on-chain certificate – demonstrating your new knowledge of major Web3 topics.
- It was the first model to be used, and it’s by far and large the most prevalent today.
- Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
- He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
- It’s worth mentioning that, apart from a few small scale pilots – particularly in China by the PBOC – no nation has implemented a CBDC yet.
- Other cryptocurrencies may fluctuate in value relative to, say, the U.S. dollar.
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