What are Stablecoins?

Here we take a look at Stablecoins and what they are

April 2020, 5 min read

image of money

A A stable coin is a new class of currency that offers many benefits like other cryptocurrencies. What makes this coin distinct is the fact that it's stable, just as the name implies. In most cases, stable coins are pegged to widely used fiat currencies such as Dollar or Euro while some are pegged to be commodities e.g., Gold

The Purpose of Stable Coins

The stable coin has varieties of uses; for some crypto traders, it serves as a way of escape when they want to hedge their cryptocurrency portfolio without having to cash out FIAT. It also tends to become a critical component in decentralized finance (which presents another alternative to already existing financial systems with the one built on public Blockchain).

Types of Stable Coins

There are three recognized forms of stable coins under a precise categorization.

  • Centralized Stable coins (supported by FIAT)
    These are 1:1 backed by fiat currencies, deposited in bank accounts. Types are: Tether (USDT), USD Coin (USDC), Gemini USD (GUSD) etc. They are centralized since a central organization, which may be either a corporation, a bank, or even a government, launches and regulates them.
  • Decentralized Stable Coins (Supported by Crypto)
    These are a fairly new form of stable coins that don't have a centralized operator but are controlled by the users who participate in the network agreeing. Users can lock up some amount of cryptocurrencies, including Ethers, as leverage to borrow DAI, which is tied to the US dollar.
  • Decentralized Algorithmic Stable Coins
    These are relatively new now. They have no collateral to back up their scheme and rely on algorithms to get their price to remain stable.

Common Stablecoins by Market-Cap

  • Tether (USDT): Tether (USDT) has undeniably been the predominant market leader when it comes to stablecoins since its formation in 2014. Tether transforms cash into digital currency and anchors its price to 1:1 US dollars. "Each tether is still 100 percent backed by the company's reserves," according to the official website. These reserves include conventional fiat currencies and cash equivalents. Current Price: $1.00, Market Cap: $7,138,905,059
  • USD Coin (USDC): USD Coin (USDC) is a stable coin launched by Coinbase, the US crypto exchange, along with the trading desk and OTC – Circle. It is planned to be pegged to 1:1 USD. Funny fact, Coinbase is thanking its customers for keeping the USDC in their account. Current Price: $1.00, Market Cap: $723,437,689
  • Paxos Standard (PAX):As with all other stablecoins, PAX can be transferred immediately, without any time or location considerations. Like the former, PAX is also connected to the US dollar by 1:1 and is based on the ERC-20 Blockchain from Ethereum. Current Price: $1.00, Market Cap: $268,860,583