So why would you want to invest in a volatile-free asset that is designed not to increase in value? Cryptocurrencies are currently going through an accelerated period of growth. Research from the Cambridge Centre for Alternative Finance suggests that the number of global crypto users has what is a stablecoin increased from 35 million in 2018 to 101 million in 2020. There’s also Tether Gold (XAUt) and PAX Gold (PAXG), which operate in a similar way, but are instead pegged to one troy ounce of investment-grade gold. A stablecoin typically goes through a few stages before someone can use it.
It is one reason why cryptoassets like Bitcoin are not widely used to pay for things. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. Speculation and rumors are swirling as highly https://www.tokenexus.com/paper-ethereum-wallet/ anticipated regulations for stablecoins in the United States reportedly draw nearer than ever. Since it adopts the existing ERC-20 token standard, it is easy to integrate into both existing and newly developed wallets and dapps. It helps developers create new ways to connect TradFi to the crypto ecosystem; allowing for new use cases and opening up the ecosystem to new users.
Tether Stablecoin: USDT
At the moment a small number of stablecoins are linked to the UK pound. Finally, another company provides a digital wallet which can be used on a smartphone or other pieces of hardware and software. The owner of the stablecoins can use this wallet to essentially store, send and receive their coins. An example of a cross-border payment is when someone sends money to family or friends in another country.
It’s common knowledge that cryptocurrency prices can drastically rise and fall within a short period of time. Recalling the historical price of Bitcoin (BTC) in February 2021, it nearly doubled, rising from around US$32,000 to US$58,800. However, its price then dramatically dropped three months later in May 2021 to approximately US$34,000.
A cryptocurrency worth $2 million might be held as reserve to issue $1 million in a crypto-backed stablecoin, insuring against a 50% decline in the price of the reserve cryptocurrency. For example, MakerDAO’s Dai (DAI) stablecoin is pegged to the U.S. dollar but backed by Ethereum (ETH) and other cryptocurrencies worth 150% of the DAI stablecoin in circulation. It’s important to note the risk of depegging may be higher for algorithmic stablecoins than for other types that have sufficient and transparent reserves. During the same time, the broader crypto market was experiencing a sell-off.
In short, it’s focused on increasing consumer and merchant comprehension of cryptocurrencies, stablecoins, and CBDCs. A stablecoin is a cryptocurrency whose value is “pegged” (meaning tied) to another asset—often a traditional fiat currency like the US dollar. For example, one unit of a stablecoin that’s pegged to the US dollar should always be worth $1. Like most digital assets, stablecoins are primarily used as a store of value and as a medium of exchange. A stablecoin is a cryptocurrency that aims to maintain price stability by pegging its monetary value to a given fiat currency, typically on a one-to-one basis. Experts say the DAI stablecoin is overcollateralized, which means that the value of cryptocurrency assets held in reserves might be greater than the number of DAI stablecoins issued.
How Stablecoins Make Money
For every stablecoin it issues, the company also holds the same value in a country’s currency. This is how the company links the value of its stablecoin to the value of something else. With cryptoassets, like Bitcoin, their value tends to move up and down a lot in a short space of time.
- Yet because they hew to the value of a single fiat currency, they act as a sort of temporary refuge for investors looking to secure their funds during a bear market.
- Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions.
- Others are skeptical, noting that they’ve played major roles in the collapse of several cryptocurrencies and crypto institutions.
- You can use MKR to create and vote on proposals to change the project.
- They aim to keep the value of stablecoins steady by tying them to something stable.
The main feature used by most CBDC proposals is the use of a blockchain or other distributed ledger system (DLT) to keep a single ledger of payments and transactions. That’s why most people would be unwilling to spend bitcoin, and most merchants would not take bitcoin as payment today. Two coins exist in this system, where one is a pegged coin and the other is a coin used to absorb the volatility of the pegged coin. Such fluctuations, or so-called ‘short-term volatility’, make cryptocurrencies unfavourable for everyday use by the general public. Creating a coin that tracks another asset’s price or value requires a pegging mechanism. There are multiple ways to do this, and most rely on another asset acting as collateral.
Why people choose stablecoins over cryptocurrencies like Bitcoin
Some would argue that stablecoins are a solution in search of a problem given the wide availability and acceptance of the U.S. dollar. Many cryptocurrency adherents, on the other hand, believe the future belongs to digital tender not controlled by central banks. There are three types of stablecoins, based on the mechanism used to stabilize their value. Stablecoins are simply a crypto asset designed to retain the same value as another asset such as a fiat currency (like USD), or even a commodity (such as gold). These types of assets allow you to avoid the potential volatility of traditional cryptocurrencies while reaping the benefits of permissionless peer-to-peer transfer of assets. One important risk is that such a rush for the exits could harm markets for the assets that back stablecoins.
Stablecoins are used as stores of value or units of account, as well as in other use cases where volatile cryptocurrencies may be less desirable. Different stablecoins use different strategies to achieve price stability; some are centralized, others are decentralized. It’s hard to find an investor or trader nowadays who hasn’t held a stablecoin at some point. Stablecoins are often held in crypto exchanges so that traders can quickly capitalize on new market opportunities.
The future of stablecoins
We explore in the Learn Crypto blog why governments see CBDCs as a way to retain control over money in a digital world. Unlike collateralised models, there is no underlying asset which can be redeemed or traded. Value derives from the expectation that the system will be able to keep the stablecoin stable. The first and most prominent example of a crypto collateral-based stablecoin is DAI, the brainchild of crypto non-profit MakerDAO.