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. The value of stablecoins of this type is based on the value of the backing currency, which is held by a third party–regulated financial entity. Fiat-backed stablecoins can be traded on exchanges and are redeemable from the issuer. The stability of the stablecoin is equivalent to the cost of maintaining the backing reserve and the cost of legal compliance, licenses, auditors, and the business infrastructure required by the regulator.
For these reasons, we are looking closely at the idea of a central bank digital currency for the UK. Our rules would only apply to stablecoins that are widely used for payment in the UK. 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. In his semi-annual monetary policy report to Congress earlier this month, Federal Reserve chairman Jerome Powell said that stablecoins were in need of tighter regulations. In Tether’s case, this has never been conclusively provided, sparking rumors that the currency was unbacked and was in fact minted out of thin air.
- Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.
- A more stable cryptocurrency is still decentralized, meaning it isn’t beholden to the rules and regulations of a centralized system.
- Stablecoins are cryptocurrencies that have their value tied to another currency, commodity or a financial algorithm.
- Stablecoins are a type of Bitcoin alternative (altcoin) that is built to offer more stability than other cryptos.
While such changes may result in additional consumer protections, they could also affect different stablecoins in different ways or result in restrictions that affect coin holders. We believe everyone should be able to make financial decisions with confidence. Examples of fiat-backed stablecoins include Tether (USDT) and USD Coin (USDC). Although not to the same extent as TerraUSD, investors worried about the reliability of reserves, and whether Tether was fully collateralized. Here’s a general guide to understanding the different stablecoins available on the market today.
Stablecoins vs. other cryptocurrencies
Tether (USDT) and TrueUSD (TUSD) are popular stablecoins backed by U.S. dollar reserves and denominated at parity to the dollar. As of late June 2024, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $112 billion. Central Bank Digital Currencies (CBDCs) will likely also be pegged to an external asset, meaning that they would need to be able to receive price data about that asset. Chainlink could support these government-issued stablecoins by providing the price data needed for them to maintain their pegs should you invest in bitcoin along with important information about the current collateralization of the system. This mechanism for verifying the reserves of an asset leverages Chainlink Proof of Reserve (PoR).
Why have stablecoins become so popular?
The value of the stablecoin issued onto the ledger is linked to the stable assets that the issuer holds. This means as soon as a coin-holder wants to exchange their stablecoins for, say, money in their existing bank account, they can do that easily and without loss. Stablecoins aim to provide an alternative to the high volatility of popular cryptocurrencies, which liquidity providers key concepts and impacts for traders can make cryptocurrency less suitable for common transactions. Algorithmic stablecoins aren’t backed by any asset — perhaps making them the stablecoin that is hardest to understand. These stablecoins use a computer algorithm to keep the coin’s value from fluctuating too much. If the price of an algorithmic stablecoin is pegged to $1 USD, but the stablecoin rises higher, the algorithm would automatically release more tokens into the supply to bring the price down.
Smart Contracts
To do so they might have to transfer across several exchanges, or even wait several days. 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 lacks the fiat necessary to make exchanges, the stablecoin can quickly lose value and become worthless. 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.
With the tethering done on-chain, it is not subject to third-party regulation creating a decentralized solution. The potentially problematic aspect of this type of stablecoins is the change in the value of the collateral and the reliance on supplementary instruments. The complexity and non-direct backing of the stablecoin may deter usage, as it may take time to comprehend how the price is ensured. Due to the highly volatile and convergent cryptocurrency market, substantial collateral must also be maintained to ensure stability.
The two most common methods are to revolut u s. launches easiest and fastest way to buy cryptocurrency maintain a pool of reserve assets as collateral or use an algorithmic formula to control the supply of a coin. Stablecoins are cryptocurrencies with a peg to other assets, such as fiat currency or commodities held in reserve. The intent behind them is to create a crypto asset with much lower price volatility, which makes them better for use in transactions. Somewhat of a sub-category of fiat-collateralized coins, commodity-backed stablecoins are cryptocurrencies that are pegged to the market value of commodities such as gold, silver, or oil.