What are Stablecoins? A simple explanation of the digital asset that bridges Crypto and Fiat

Stablecoins occupy a unique space in the financial sphere, transcending the world of traditional finance and cryptocurrency. These digital assets aim to achieve price stability by linking their market value to external references such as fiat money. Stablecoins blend the characteristics of cryptocurrencies with the stability of traditional assets like the US dollar or commodities like gold, resulting in digital tokens with limited volatility. By stabilizing their purchasing power, stablecoins offer a level of reliability currently lacking in pure, decentralized cryptocurrencies. Let’s delve into what stablecoins are, the different types available and their origins.

Stablecoins: Bridging Crypto and Fiat for price stability

Today, the vibrant stablecoin ecosystem has an impressive total value of $123 billion, encompassing many projects. After being a prominent presence in the financial landscape for almost a decade, stablecoins have established themselves as pillars of the crypto universe.

Leading the market in terms of capitalization are well-known stablecoins such as tether (USDT), usd coin (USDC), dai (DAI), trueusd (TUSD) and binance usd (BUSD). Stablecoins aim to achieve price stability by linking their market value to external references, such as fiat currency or commodities. These digital assets blend elements of cryptocurrencies with traditional payment and value storage methods, offering a form of price reliability.

The eight largest stablecoins by market capitalization on September 9, 2023

In contrast to decentralized cryptocurrencies like BTC or ETH, the majority of stablecoins are usually centralized, under the control of central issuers. These central entities have the power to freeze tokens linked to fiat currencies and take control of the funds. Conversely, decentralized digital currencies like BTC or ETH are immune to such interventions, giving them a distinct advantage in terms of trustlessness and fostering innovation.

The four types of Stablecoin Token assets

There are four primary types of stablecoins: fiat-collateralized, crypto-collateralized, commodity-collateralized and algorithmic stablecoins.

Fiat-backed stablecoins are linked to government-issued currencies such as the US dollar, the British pound and the eurozone euro. For every stablecoin in circulation, there must be an equivalent dollar in reserve, at a ratio of 1:1. Tether’s USDT is the most popular fiat-backed stablecoin, both in terms of activity and market capitalization.

The mechanics of a fiat-pegged stablecoin asset.

Crypto-secured stablecoins use other cryptocurrencies as reserves instead of fiat. Makerdao’s DAI stablecoin accepts ether as collateral. Holders deposit ether in smart contracts to support the minting of DAI tokens. The Trons USDD works in a similar way, utilizing TRON (TRX) for USDD support.

Commodity-backed stablecoins tie their value to real assets such as precious metals. Tether Gold uses gold bars stored in vaults to back up its XAUT token. This gold security gives XAUT an intrinsic value beyond the realm of cryptocurrencies. Other precious metals and commodity-backed stablecoins follow similar pegging methods.

Algorithmic stablecoins, on the other hand, lack security. They rely on smart contracts and delivery adjustments to maintain a consistent price. When demand increases, additional coins are issued, and when demand decreases, coins are repurchased and taken out of circulation. The Terra stablecoin UST was originally an algorithmic stablecoin, but it lost all its value when the Terra blockchain ecosystem collapsed.

The history of Stablecoins

Stablecoins first appeared around 2014, driven by crypto enthusiasts’ desire to mitigate volatility. Bitshares, founded by Dan Larimer, introduced BITUSD, one of the earliest stablecoins, linked to the US dollar. In the same year, Tether introduced USDT, also linked to the dollar. Today, there are over 200 stablecoins, reflecting the demand for stability in the crypto space. In November 2018, BITUSD lost its link to the US dollar and has not regained it since. Tether has been a leader since its inception and boasts the largest market valuation at $82 billion.

The benefits and risks of Stablecoins

Stablecoins act as a bridge between fiat currencies and digital assets, improving the usability of the blockchain for payments, lending and trading. They provide the price stability required for cryptocurrencies to function as everyday money, ensuring that the value transferred remains constant without price fluctuations. Their emergence represents a significant milestone in blockchain’s gradual journey towards mainstream adoption.

In summary, stablecoins have emerged as a crucial component of the cryptocurrency ecosystem, offering benefits such as price stability and reliability in an otherwise volatile market. With a total value exceeding $123 billion and a variety of types to choose from, stablecoins have proven their worth in facilitating payments, lending and trading.

However, it is important to recognize that not all stablecoins have succeeded; some have experienced failures, which underlines the risks of this space. Nevertheless, as the crypto landscape continues to evolve, stablecoins remain a key bridge between traditional finance and digital assets, shaping the path towards wider adoption and financial innovation.

About the Viking

With Viking’s signals, you have a good chance of finding the winners and selling in time. There are many securities. With Viking’s autopilots or tables, you can sort out the most interesting ETFs, stocks, options, warrants, funds, and so on.

Click here to see what Vikingen offers: Detailed comparison – Stock market program for those who want to get even richer (vikingen.se)