Stablecoin invasion The next big thing in crypto?

what is a stablecoin

Stablecoin investors need to verify the backing claims made by developers to safeguard their money. Interestingly, what is a stablecoin Kwon spoke dismissively of DAI, going so far as to proclaim that by his hand, DAI would “die”.

Long-time isolated from the falls in crypto coins like Bitcoin and Ethereum, stablecoins were designed to sidestep crypto volatility and supposed to remain stable across the crypto ecosystem. Burning is the cryptocurrency term for removing coins or tokens from circulation to maintain the value of circulating coins.

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As of July 2022, it is the third-largest cryptocurrency by market capitalization and the first largest stablecoin by market cap. Its market cap as of July 15, 2022, is $65,812,173,139, according to CoinGecko. Fiat-collateralized stablecoins use fiat currencies as collateral to maintain stability.

Where can I learn more about stablecoins?

You can learn more about how stablecoins work in our cryptocurrency learning section. We also have courses that help you understand the blockchain, or cryptocurrency in general. You can find out more about how to invest in different cryptocurrencies on our investing hub.

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The future of money –  digital wallets

‘Bouts’ of volatility will probably continue as the cryptosector digests the repercussions of the failure of the TerraUSD peg, while US policy rate increases and equity volatility may pressure so-called ‘high-beta assets’. Investors can buy stablecoins in the same way as they purchase any other cryptocurrency.

  • is not a subsidiary of any marketing agency, nor are we owned by any crypto or blockchain foundation.
  • The growing adoption and ongoing innovation in respect of cryptocurrency and blockchain technology continues to give rise to distinct legal and regulatory uncertainty.
  • Stablecoins are a form of cryptoasset that are typically pegged to a fiat currency such as the dollar and are intended to maintain a stable value.
  • The value of collateral a developer sets aside exceeds the value of the minted stablecoin.
  • Gold-backed stablecoins are valued as one unit of cryptocurrency to a predetermined unit of gold, typically a gram of the precious metal.
  • In the TerraUSD system, a special crypto token called LUNA is used to help UST hold its 1-to-1 peg value with the U.S. dollar.

Bitcoin derives its value partly from the costs involved in creating or “mining” new coins, but also from demand in the market. This has similarities with gold, where the value goes beyond its mining recycling and storage cost. A stablecoin derives its value from being pegged against a currency such as the dollar. Another use case for stablecoins is to provide a stable price-pegging mechanism for other assets. For example, if you are selling goods or services denominated in USD but you only accept cryptocurrency, you can use a USD-backed stablecoin to ensure that your prices remain stable. Crypto-collateralised stablecoins are coins backed by a reserve of cryptocurrency rather than fiat currency. The arrival of MiCAR is certainly positive for the coming of age of the crypto sector, and for banks’ possibilities to engage with crypto.

What Is a Stablecoin?

With the very legitimacy of stablecoins being questioned by some – and with the prospect of regulation looming – it’s important that both retail and institutional investors have a nuanced understanding of this diverse asset class. Stablecoins have been much in the news lately in the wake of the collapse of algorithmic stablecoin TerraUSD and its governance token LUNA. The event has brought renewed widespread awareness – and scrutiny – to what is supposed to be the least volatile sector in crypto. Non-financial regulatory requirements include privacy, data protection, information security, and cybersecurity. How did what was only recently the third-largest stablecoin by market cap fall by around 95 percent to $0.05 within a matter of days? Let’s begin to unpack this question by taking a closer look at how Terra maintains the peg between UST and USD. “We must reinforce United States’ leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.”

  • The stablecoin asset class has taken off in popularity because of the need for a predictably priced cryptocurrency that can serve as a safe haven in a market dominated by wild price swings.
  • As the name implies, crypto-collateralized are stablecoins backed by traditional cryptocurrencies.
  • So if you’re a trader from the UK, you may prefer to switch your Bitcoin holdings to BGBP as opposed to USDT in order to avoid being exposed to foreign currency risk.
  • Most people have heard of cryptocurrencies, particularly the most well-known one – bitcoin.

The model meant new Luna coins would be issued to keep the value of UST pegged at $1. Luna was Terra’s collateral in the same way the US Dollar was Tether’s collateral. Stablecoins can be bought and traded like any other cryptocurrency via crypto exchanges such as eToro or Coinbase. For example, if you wanted to send someone an amount of money in pounds Sterling, you’d need to involve banks or payment services providers to move the money. This was to be maintained by reserving $1 USD as collateral for every token of Tether issued. When a Tether holder sells their holdings, an equal amount of US dollars are also removed from the reserve of collateral.

Earn more on the stablecoins you buy, hold or transfer!

Corporate and institutional users may want to limit their exposure to single banks. Instead, algorithms and smart contracts maintain the stability of tokens by actively controlling the token supply. In vague terms, algorithmic stablecoins are loosely tied to fiat currency as they trace a particular fiat currency. The crypto winter has done little to curb central banks’ enthusiasm for digital currencies, at least insofar as those issued by themselves. 2023 is promising to become another busy year for the “digital euro”, the ECB’s retail-oriented CBDC project.

what is a stablecoin

However, you can minimise this risk by building a portfolio of different digital assets rather than investing a large amount of money in a single stablecoin. The most obvious use case for stablecoins is to provide a hedge against the volatility of cryptocurrencies. For example, if you hold Bitcoin and the price drops, you can swap your Bitcoin for a stablecoin and mitigate losses. This type of stablecoin offers a good middle ground between the security of a fiat-backed coin and the decentralisation of a crypto-collateralised currency. The technical mechanism behind stablecoins can vary depending on the type of coin. For example, some stablecoins are backed by a reserve of fiat currency, while a commodity like gold may support others.

Announcement part of a series of measures to make the UK a global hub for cryptoasset technology and investment. Stablecoins to be brought within regulation paving their way for use in the UK as a recognised form of payment. The growing adoption and ongoing innovation in respect of cryptocurrency and blockchain technology continues to give rise to distinct legal and regulatory uncertainty. All Sponsored Posts are paid for by crypto projects, coin foundations, advertising firms, PR firms, or other marketing agencies. is not a subsidiary of any marketing agency, nor are we owned by any crypto or blockchain foundation.

what is a stablecoin

The developer of the stablecoin uses a similar process to peg the coin. The developer company must set aside a fixed amount of fiat currency (U.S dollar, European euro, etc.), gold, or another cryptocurrency. The initial use case for stablecoins began in 2014 in the crypto currency world with tether. Previously, it was very difficult and expensive to trade back and forth from the “fiat” to the crypto world.

Centralized stablecoins are the first type of stablecoin category to hit the market, and to some extent explains why they are the most dominant type of stablecoin in the market. In the case of a fiat-collateralized stablecoin, a potential run would result in a custodian having to sell fiat-based assets in a forced sale to honour its obligation towards the sellers of a stablecoin.

  • With traditional stablecoins, regulators also want to know that their operators have sufficient assets to pay out customers in the case of a run on the system.
  • Eurodollar deposits are dollar-denominated and not subject to US regulation.
  • For stablecoins to be useful as a means of payment, transaction fees on the blockchain pm which they are implemented must be low.
  • Boost your earning potential when you invest in stablecoins with AQRU.
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  • For one thing, the popularity of stablecoins largely correlates with the increased mainstream adoption of cryptocurrencies.