What Is a Stablecoin? A Guide to Asset-Backed Cryptos

what is a stablecoin

When it’s above $1, users are incentivized to create the token, increasing its supply and lowering the price. DAI is just one example, but all crypto-backed stablecoins rely on a mix of game theory and on-chain algorithms to incentivize price stability. The most popular stablecoins are tether (USDT), USD coin (USDC), binance dollar (BUSD), and dai (DAI). These coins are well known due to their market capitalization as well as their utility in financial markets. The main benefit of a stablecoin is to provide price stability in the crypto market since its value always remains constant. Since they lack volatility, they are great for borrowing, lending, and making payments especially abroad.

Volatility makes it challenging to use cryptocurrencies for day-to-day payments. For example, merchants may take $5 in BTC for a coffee one day https://www.tokenexus.com/what-is-a-stablecoin-and-how-does-it-work/ but find that their BTC is worth 50% less the next. This makes it challenging to plan and operate a business that accepts crypto payments.

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Double-spending and false transactions are also almost impossible to run into. Crypto-backed stablecoins use smart contracts to manage minting and burning. This makes the process more reliable as users can independently audit the contracts. However, some crypto-backed stablecoins are run by Decentralized Autonomous Organizations (DAOs), where the community can vote for changes in the project. In this case, you can get involved or trust the DAO to make the best decisions.

Any estimates

based on past performance do not a guarantee future performance, and

prior to making any investment you should discuss your specific investment

needs or seek advice from a qualified professional. Therefore, it’s very likely that most – if not all – CBDCs will be permissioned networks, as opposed to Bitcoin’s open nature. Currently only a handful of such projects exist, such as Bdollar – and then, with a very limited circulating supply.

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Let’s use an example to understand the problem this would create if the everyday purchases you normally make in Euros were also priced in bitcoin. Stablecoins are backed up by “reserves,” where the assets backing the stablecoin are securely stored and act as collateral. Utility benefits of crypto include fast financial transfers between two accounts, international transfers that are a lot cheaper than using banks and a wider access to financial services. If you’re curious about cryptocurrency, think about using some “fun money” — those dollars left over after you’ve built your savings and paid for essential expenses. If you’re looking to add some riskier assets to your portfolio, individual stocks can also fill that role. Despite the fact that stablecoins may be less volatile than other forms of crypto, they are still using newer technology which may have unknown bugs or vulnerabilities.

Cryptocurrencies like Bitcoin and Ethereum offer many benefits, including decentralization, intermediary-free transactions and much more. However, one of cryptocurrency’s key drawbacks is that they are notoriously volatile, meaning the prices are unpredictable and have a tendency to fluctuate wildly. Although the exact mechanisms vary from one coin to the other, backed stablecoins are built to be somewhat resistant to that volatility, so you won’t see significant price changes. Stablecoins are an attempt to create a cryptocurrency token with a stable price.

How Do Stablecoins Work?

Jupiter’s active trading pairs feature USDC heavily, with USDC/SOL leading in volume at $65,612,311. You don’t need a bank account to hold stablecoins, and they’re easy to transfer with fast processing and low transaction fees. In addition, stablecoins can be transferred quickly internationally, including to places where the US dollar may be hard to obtain or where the local currency is unstable.

what is a stablecoin

Stablecoin advocates believe these cryptocurrencies are critical for bridging “real-world” assets like fiat currencies with digital assets on the blockchain. Others are skeptical, noting that they’ve played major roles in the collapse of several cryptocurrencies and crypto institutions. Due to its volatility, cryptocurrencies haven’t achieved widespread use for day-to-day payments.