What Are Stablecoins and How Do You Use Them?

what is a stablecoin

So another way to think about stablecoins is as a tokenized version of a fiat currency. In theory, a U.S. dollar-based stablecoin is a token that will reside on a blockchain and always trade for one dollar. Most users, especially newcomers to crypto, buy stablecoins on a centralized exchange, such as Binance or Coinbase, by using fiat currency or other cryptocurrencies. This is because they can then effortlessly purchase and trade the cryptos they want on this platform, or stake the stablecoin for fixed interest or yield.

As in the broader digital asset industry, regulation of stablecoins is extremely fragmented. In some circumstances, legislators have enacted new digital-asset-specific regulations (Switzerland, Gibraltar) or are looking to do so (EU). If you’re unwilling to take a ride on the roller coaster of volatile cryptocurrencies like Bitcoin or Ether, stablecoins might be more your speed.

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Some types of stablecoins can also be used for crypto staking, in which cryptocurrency owners can earn rewards by essentially lending out their holdings to help execute other transactions. Staking carries risks, however, so make sure you read up on the specifics for the coin you intend to use. TerraUSD’s price was pegged at $1 via the minting (creation) and burning (destruction) of a sister coin, Luna. There was no collateralisation, with the entire model running via this algorithmic minting and burning of Luna tokens each time a UST stablecoin was bought or sold. Stablecoins are neither issued nor regulated by a central bank or government. Stablecoins aim to provide an alternative to the high volatility of popular cryptocurrencies, including Bitcoin (BTC), which can make cryptocurrency less suitable for common transactions.

  • The firm has accepted stablecoins tether (USDT) and USD Coin (USDC) from as many as 10 of its institutional and accredited investors, co-founder Bo Bai told CoinDesk in an interview Wednesday.
  • Market capitalisation is the total number of tokens that exist multiplied by the value per token.
  • While we believe that there will likely be multiple blockchain networks that the payments ecosystem will use, we see potential for the Solana blockchain network to become one of the networks that could help power mainstream payment flows.
  • USDC is a stablecoin outlier in disclosing precise data regarding its assets and liabilities.
  • The algorithm is designed to secure the stablecoin’s currency peg to supply and demand.

With the crypto boom of 2017 behind 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. what is a stablecoin And regulators are warming up to them, too; in September 2020, the US Office of the Comptroller of the Currency (OCC) gave national banks and federal savings associations the green light to hold reserves for stablecoin issuers.

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These reports verify that the number of USDC tokens in circulation matches the amount of US dollars held in reserve bank accounts. This process is designed to instil confidence in users that each USDC token is indeed backed by a corresponding US dollar. Launched in September 2019, BUSD is independently managed by Paxos and its monthly audits are available on its website. https://www.tokenexus.com/what-is-a-blockchain-protocol/ You can buy BUSD on Binance, and redeem the stablecoin from Paxos if needed. BUSD has the same function as any stablecoin — to help crypto traders in the volatile crypto markets by providing a cryptocurrency with a stable price. The protocol behind stablecoin Dai is an open-source platform that anyone can use to create Dai tokens against crypto collateral assets.

However, for many years they have struggled to scale to support secure, high throughput, low-cost transactions that payment companies require, and consumers expect. Our goal has been to deeply understand the technical properties of blockchain networks and experiment with how we can leverage them to help enhance our existing network as well as build new products for commerce and money movement. Solana’s blockchain network has attributes like high transaction throughput and scalability at low cost that help make it a good candidate for payments and Visa’s stablecoin settlement pilot.

Fiat-backed stablecoins

Though Meta has since abandoned the project, it left behind a legacy of increased global interest among financial institutions and heightened regulatory scrutiny in the digital asset space. Because their value does not fluctuate as wildly as free-floating cryptocurrencies, they are more suited for use as a means of payment in everyday transactions and as store of value. It is the first stablecoin to programmatically control minting with instant on-chain verification of USD reserves held off-chain. TUSD’s reserves are monitored using Chainlink Proof of Reserve so that holders can autonomously verify that their TUSD is backed by USD held in reserves. Before, crypto investors and traders had no way to lock in a profit or avoid volatility without converting crypto back into fiat.

what is a stablecoin

Karl works with several organizations in the equities, futures, physical metals, and blockchain industries. He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts. As of late July 2023, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $83 billion.

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