Cryptocurrency exchange

What Are Stablecoins and How Do You Use Them?

what is a stablecoin

Traders and investors can earn interest with some fiat or gold-backed stablecoins via lending and staking. When you lend stablecoins, you can earn interest payments from borrowers. And by putting your coins at stake, you have the chance to earn rewards. Assets such as backed stablecoins can give risk-averse buyers and sellers certainty that the value of their tokens won’t rise or crash unpredictably in the near future. For both beginners and seasoned traders, the stable and certain nature of backed stablecoins makes them a good asset to hold on to or invest in, especially during the bear market seasons.

what is a stablecoin

For example, merchants don’t want to risk a loss if the price of crypto plunges after a payment. Furthermore, institutions consider stablecoins to be a universal solution for settling international payments. Stablecoins make cross-border transactions cheaper, faster, and more efficient overall.

A Stablecoin Pilot in China?

In fact, the lack of regulation surrounding stablecoins has made it more feasible for issuers to make false claims regarding their backing. 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. Each CACHE is backed by 1g of pure gold held in the vaults stored around the world. Sending CACHE tokens is the equivalent of sending 1g of gold per token since they can be easily redeemed for physical gold at any time. The first method stablecoin issuers use to make money is through the straightforward charging of redemption and issuance fees. Conventionally, this would require foreign exchange (FX) conversions with multiple banks and intermediaries.

what is a stablecoin

Whenever the holder of a stablecoin wishes to cash out their tokens, an equal amount of the collateralizing assets is taken from the reserves. It has cemented its status as one of the country’s most innovative investment platforms, offering a full range of banking services to support clients in their day-to-day life and in building their own stories. BTG Pactual is also a pioneer on the ESG front, with financial products that support the transition to a greener, more sustainable economy. The award-winning bank has won numerous international awards and has over six thousand employees in Brazil, Chile, Argentina, Colombia, Peru, Mexico, the US, Portugal and England. Though the kinks are still being ironed out, Stablecoins have a huge potential to change the global payment landscape.

Minimize volatility

These stablecoins use a mix of smart contracts on the blockchain to lock in cryptocurrency reserves instead of relying on a central financial institution to hold reserves like fiat-backed cryptocurrencies. The technical implementation of this type of stablecoins is more complex and varied than that of the fiat-collateralized kind, which introduces a greater risk of exploits due to bugs in the smart contract code. 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.

  • Fiat-collateralized stablecoins are usually more centralized than other cryptocurrencies.
  • Unlike the three stablecoins mentioned above, DAI is not backed by U.S. dollars but by a combination of various crypto assets.
  • Our estimates are based on past market performance, and past performance is not a guarantee of future performance.
  • Here’s a general guide to understanding the different stablecoins available on the market today.
  • Allocating a certain percentage of a portfolio to stablecoins is an effective way to reduce overall risk.
  • Here’s how stablecoins work, what risks they present and how to check if a stablecoin is safe.
  • FDUSD/USDT and ETH/FDUSD also contribute, albeit to a lesser extent.

Stablecoins have become a key component of a developing class of products known as DeFi, or decentralized finance, in which transactions can be carried out without a middleman such as a bank or broker. And some stablecoins, such as Tether and USD Coin, are among those with the highest market capitalizations on the cryptocurrency market. Such reserves are maintained by independent custodians and are regularly audited.

Stablecoin USDC Ditches Tron Network, Cites Risk Management

We believe everyone should be able to make financial decisions with confidence. On the other hand, decentralized stablecoins have revenue modes that vary from protocol to protocol. The graph below shows USDC’s collateral reserves as of August 2022—at $54 billion, the coin’s reserves are slightly greater than its liabilities of $53.8 billion. Here’s a general guide to understanding the different stablecoins available on the market today. 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.

  • Tether dominates the stablecoin market with a 71.47% share, far ahead of its closest competitor, USDC, at 20.57%.
  • Intraday swings also can be wild; the cryptocurrency often moves more than 10% in the span of a few hours.
  • Stablecoins aim to solve this uncertainty, attempting to combine the stability of cash with the benefits of crypto technology.
  • These assets are less stable than fiat-backed stablecoins, and it is a good idea to keep tabs on how the underlying crypto asset behind your stablecoin is performing.
  • Stable cryptocurrencies are an attempt to establish some form of guarantee to the market.