For investors interested in gaining exposure to cryptocurrency but are worried about volatility, stablecoins are the answer. While cryptocurrencies such as Bitcoin and Ethereum have disrupted the way many investors think about money, traditional investors may opt to steer clear as prices can change drastically from one moment to the next. Stablecoins, on the other hand, are much less subject to volatility, in fact, they have virtually none at all.
Most stablecoins are backed by a real world asset such as fiat currency. A fiat currency is a government-issued currency, such as the US dollar, euro and the yen. Stablecoins bridge the worlds of cryptocurrency and everyday fiat currency.
Since a stablecoin offers a predictable and steady value it makes sense that they would be ideal for recurring payments such as utilities, rent, salaries and other goods and services. They also offer the advantage of extremely fast transaction settlement times, usually just a few seconds and low transaction fees. Whereas traditional transaction methods, such as a credit card can take up to 48 hours to settle and cost up to 3.5% in fees. Many within the crypto industry view this as a significant step towards wider spread adoption.
USDC (USD Coin)
USDC is a fiat-collateralized stablecoin that is pegged to the value of the US dollar. It was launched by CoinBase and Circle which is supported by a little company called Goldman Sachs. USDC submits to regular audits to ensure that the necessary reserve funds are available.
This is one of the largest stablecoins with a market capitalization of 26 billion as of the recording of this video and continues to see significant growth since launching in 2018. USDC is fully backed by reserve assets and redeemable on a one-to-one basis for a US dollar. For example, if an issuer/creator holds one billion of US dollars in reserve, only one billion of those stablecoins can be in circulation.
USDT, better known as Tether, is one of the first stablecoins. It remains as one of the most popular cryptocurrencies with the third largest capitalization rate just behind Bitcoin and Ethereum at 63 Billion dollars in circulation.
Over-collateralized stablecoins use crypto as collateral. These coins are minted by over-collateralizing an existing digital asset, such as Ethereum, to allow for the dynamic maintenance of a consistent market price. This structure provides a buffer against price fluctuations caused by the underlying collateral.
To receive an over-collateralized stablecoin, you must lock your collateral “tokens” in what’s called a smart contract — the backbone of crypto. (Tokens refer to cryptocurrencies that are built on blockchains that are not their own.) The collateral is redeemable at a later date by paying the stablecoin back into the smart contract, thus liquidating the position.
DAI (pronounced “die”) is the most popular over-collateralized coin and currently maintains a market cap of five and a half billion dollars.
Algorithmic stablecoins are an emerging subsector that do not use fiat, crypto or commodities as collateral. Instead, their price stability results from algorithms and smart contracts that manage the supply of tokens that are in circulation.
An algorithmic stablecoin system automatically reduces the number of tokens in circulation when the price falls below the target price — one US dollar for example. Alternatively, if the token price exceeds that target price, more tokens are issued to adjust the value downward, in accordance with the principles of supply and demand.
US Terra or UST is an example of an Algorithmic stablecoin. UST has gained massive popularity with over two billion dollars minted and in circulation. UST continues to grow at a rapid rate because it has diverse and practical daily uses.
Now that you have an understanding of what a stablecoin is, make sure to watch our How-To videos on all the ways you can use them to start earning high interest returns!