Stablecoins are the hot topic now, but what is a stablecoin? The ‘boring’ coin of the cryptocurrency world, stable coins are highly stable digital currencies which are pegged to real-world assets. In this article, we’ll cover all the basics you need to know about stablecoins; how they work, how to buy them, and if they’re regulated.
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What is a Stable Coin?
A stable coin is a type of cryptocurrency whose value is tied to a real-world asset or currency such as the US dollar. Stablecoins were developed to offer more stability than other cryptocurrencies, which are known for their volatility. Stablecoins maintain their stability by being backed by a reserve of the asset they represent or by the use of algorithms that keep their value from fluctuating excessively.
Stable Coin Examples
There are a wide variety of stablecoins in existence, many of which are pegged to the US dollar. By being a free market, the world of cryptocurrency has encouraged the emergence of multiple competing stablecoins which are stable in value but may function in different ways. Here are a few examples of types of stable coins that are pegged to USD:
- Tether (USDT)
- Dai (DAI)
- Binance USD (BUSD)
- USD Coin (USDC)
- TrueUSD (TUSD)
How does stablecoin work?
Stablecoins are cryptocurrencies that are designed to maintain an exact one-to-one peg to a more stable underlying asset, such as a national currency like the US dollar. With this price stability, stablecoins are intended to help manage the volatility in the crypto market; allowing market participants to make trades with ease. This in turn improves the usability of the other, more volatile cryptocurrencies and increases the accessibility and liquidity of the crypto market.
Stablecoins allow market participants to move in and out of crypto trades with ease, improving the usability of volatile cryptocurrencies and creating more liquidity in the crypto market. The direct peg to a more stable asset allows market participants to use stablecoins when crypto price swings become difficult to manage. How stablecoins work and maintain their stability depends on the type of stable coin.
Types of Stablecoins
All stablecoins are digital currencies on the blockchain ecosystem. Stablecoins can be recognized primarily by the collateral structures which back them. There are four different types of collateral structures:
Fiat-collateralized stablecoins are linked to the sovereign legal tenders of countries. Some of the most well-known stablecoins are fiat-collateralized stablecoins, for example, Tether and TUSD. These coins are issued by companies depositing an equal amount of fiat in their reserves.
Commodity-backed stablecoins are backed by reserved assets which aren’t fiat currencies. This could include commodities such as real estate, gold, silver, and various other precious metals. An example of a commodity-backed stable coin is Kitco Gold, which is backed by the company’s gold reserves.
Crypto-backed stablecoins are crypto collateralized, meaning they are backed by other cryptocurrencies. An example of a crypto-backed stable coin is Dai, which is on the Ethereum blockchain and aims to keep its value as close to one US dollar as possible.
Algorithmic stable coins are non-backed and are controlled with the help of special algorithms, software, and code. These help manage supply and demand, prices, and other variables. Algorithmic stable coins allow the company to maintain a reserve peg in case of price fluctuations.
How to buy stablecoins?
Buying stablecoins is very similar to buying any other cryptocurrency. You’ll either need an account with a crypto exchange or an account with a digital wallet which allows you to buy crypto directly. With the former, you’ll likely also need a crypto wallet where you can hold your stable coin once you buy it.
Depending on the platform, stablecoins can be purchased in exchange for either fiat currencies or other cryptocurrencies. Typically, you’ll be able to buy stablecoins using other tokens from decentralised exchanges, whereas centralized exchange platforms may only allow you to buy stablecoins in exchange for fiat currencies. Different platforms will offer different payment methods as well, with some allowing you to pay using alternative methods such as PayPal.
Stable Coin Regulation
As stablecoins continue to rise in popularity, there is an increasing push by experts for stablecoins to be regulated. For example, in 2021, the International Organization of Securities Commissions (IOSCO) suggested that stablecoins should be regulated as a financial market infrastructure alongside payment systems and clearinghouses. Similar calls for regulation have been brought up by politicians, with the hope of conducting regular audits or holding stable coin markets to similar regulations to banks.
Calls for regulations are strongly influenced by the risk of failure of stablecoins, with experts hoping that the introduction of tighter processes will allow for investors to have greater peace of mind when buying and trading with stablecoins. The regulation of stablecoins would be the first instance of rules for crypto markets, but it’s important to note that it is unlikely to be a ‘one rule fits all’ situation. Rather, different types of virtual assets are likely to be regulated in different ways. However, it may take some time before we see any concrete plans for issuing regulations on stablecoins; at the moment it is just a topic of conversation.
Stablecoins are a largely dependable and increasingly appealing way to get involved in cryptocurrency. With a large amount of choice and the reduced risk of volatility, it’s easy to see why stablecoins are so popular. If you’re looking for other easy ways to get involved in the world of cryptocurrency, check out hi, a next-gen exchange and banking platform that allows you to trade, send and earn crypto & fiat.