A stablecoin is a cryptocurrency whose value is fixed by pegging it to a stable asset such as the US Dollar, gold, a barrel of oil, or any other fiat currency or commodity. As a result, it gives you a base asset that can be used as a currency to trade with other assets.
Stablecoins are generally treated in the same way as their base asset (such as the US Dollar). For example, the stablecoin USDT gets the same treatment as a US Dollar.
Definition
A stablecoin is a cryptocurrency whose value is fixed and does not fluctuate. Such cryptocurrencies are created to ensure that there is a base currency to trade in the markets, which also protects users from volatility.
Stablecoins generally exist on multiple chains and do not generally have any native chain such as Bitcoin or Ethereum. They are generally multichain, allowing free flow of capital across different chains.
Purpose
Stablecoins serve several purposes; a few important ones are listed below.
Act as a Base Currency (Unit of Accounting)
The purpose of a stablecoin is to provide a unit of accounting that can be used to compare all other assets. For example, we use the US Dollar to compare the prices of different laptops.
Protection from Market Volatility
Another core purpose of a stablecoin is to protect users from volatility. When users expect market volatility during a bear or a bull market, they usually sell their assets and keep their money in stablecoins, which, due to their nature, do not allow capital depreciation. Had they kept their money in Bitcoin, it could have been exposed to market risks that could have caused its value to crash.
Cross-Border Payments
Stablecoins are also used for cross-border payments. They are much faster than SWIFT or other money transfer methods (even faster than PayPal, Venmo, or Payoneer). As a result, small businesses like mine heavily rely on them. A typical USDT or USDC transfer usually takes less than a minute to transfer funds anywhere in the world.
Types of Stablecoins
Based on Underlying Assets
A stablecoin usually has an underlying asset (except for pure algorithmic stablecoins). Based on these assets, they can be categorized as fiat stablecoins, gold stablecoins, commodity stablecoins, etc.
Fiat-backed Stablecoins
These stablecoins are backed by fiat currencies such as the US Dollar, Japanese Yen, Euro, or other currencies. Fiat stablecoins are highly popular because they act similarly to fiat currencies but, being cryptocurrencies, are easily used in crypto markets, often gaining the term “evolution of money”.
Often stablecoin issuers keep these stablecoins 100% collateralized using cash, bonds, goverment treasuries, bank notes, and other liquid assets.
Some examples are USDT, USDC, EURT, ZCHF, etc.
Gold-backed Stablecoins
These stablecoins are pegged to the value of gold in different denominations such as 1 gram, 10 gram, 30 grams (1 ounce), etc. They are similar to gold and often act as a medium of currency where fiat backed stablecoins are not used. These stablecoins also act as modes of international settlement since gold is universally accepted.
An example of a Gold-backed stablecoin is the XAUT issued by Tether.
Commodity-backed Stablecoins
These are stablecoins pegged to assets such as 1 barrel of oil, or 1 gram of Uranium, etc., and is used primarly for trade purposes.
An example of such a stablecoin was the Pedro, a Venezuelan stablecoin issued by the government which was pegged to the price of 1 barrel of crude oil.
Based on Collateralization
Collateralized Stablecoins
Collateralized stablecoins are those which are backed by some asset, such as fiat money, gold, commodities, or even other cryptocurrencies. These are the most commonly available stablecoins and have wide usage across the world.
For example: USDT (fiat backed), XAUT (gold-backed), DAI (crypto-backed), etc.
Algorithmic Stablecoins
These stablecoins do not have anb underlying asset but rather depend on algorithms to maintain their value. During price crashes, they burn coins to control supply, and during price rises, they print more coins to control demand.
Some examples of such coins are Ampleforth.
Hybrid Stablecoins
These stablecoins are a mix betweel collateralized and algo stablecoins. They have some partial backing such as say 25% reserves, and also have algorithms to balance their value incase of price volatility.
An example of such a stablecoin is DAI, which has algorithms in place to control price but is also backed by asset pools containing Bitcoin, Ethereum and other cryptocurrencies.
Based on their Nature
Based on their nature, stablecoins are divided into true and apparent stablecoins.
True Stablecoins
True stablecoins are those that are multi-chain, can be easily exchanged with other cryptocurrencies, and are universally accepted. These coins fulfill all the purposes of a stablecoin mentioned in the previous sections.
Examples: USDT, USDC, USDD, USD1, TUSD, RLUSD, XAUT, EURT, etc.
Quasi Stablecoins
Quasi stablecoins are those cryptocurrencies that have fixed value, can be transferred to each other, but cannot be interchanged freely with other cryptocurrencies like true stablecoins.
These are mostly reward tokens, LP tokens, yield tokens, etc. A few examples are BFUSD (Binance’s Yield Token), stUSDT (staked USDT), etc.
Frequently Asked Questions
1. Can anyone buy stablecoins?
Yes, if you are buying from a DEX, you simply need to bring cryptocurrency and a wallet to swap for stablecoins.
However, if you are buying from centralized exchanges, you need to have KYC and AML compliance. which typically restricts many users.
Disclaimer: Information provided on Tether News is for purely educational purposes and does not constitute investment or trading advice under any circumstances. Kindly consult your financial advisor before investing or trading in crypto markets.