What are stablecoins?

What are stablecoins?

Stablecoins are a type of cryptocurrency that is tied or “pegged” to another asset – usually a fiat currency like the US dollar or a commodity like gold – to make them more “stable” for crypto investors.

The price of cryptocurrencies such as Bitcoin and Ethereum can fluctuate, sometimes wildly, on a daily basis. The price of gold and the US dollar, on the other hand, swings much less aggressively. This makes stablecoins a more reliable medium of exchange, like conventional currency.

Some people believe this is what makes stablecoins more future-proof than traditional cryptocurrencies.

What’s more, if you’re a trader, you’re going to need another, more stable, asset to trade against something like Bitcoin. While many centralized exchanges accept dollar or euro deposits directly, if you want to trade in a decentralized manner, you’ll need an alternative.

The Nash app lets you trade thousands of crypto coins, all on fully decentralized markets where you remain in control of your funds. And it’s easy to buy stablecoins so you can get started!

How do stablecoins work?

As we mentioned at the start, most stablecoins are “fiat-collateralized”. Let’s take a simple example of how they work.

Imagine we want to set up a dollar stablecoin.

In order to peg this stablecoin against the dollar, we buy 1 million dollars to act as our “reserve” for the 1 million stablecoins we are about to release.

The 1 million dollars now acts as collateral for the 1 million stablecoins. The reserve should be maintained by an independent custodian and regularly audited.

Stablecoin holders should be able to redeem their coins against these reserve dollars, if they so wish.

The stablecoin is uniquely pegged to the asset and its holders benefit from the lower fluctuations of the asset.

An example of such a stablecoin is USDC, issued by the company Circle.

What other types of stablecoin are there?

Crypto-collateralized stablecoins

As the name suggests, crypto-collateralized stablecoins are backed by other cryptocurrencies.

Because of the perceived volatility of the reserve, these coins are often over-collateralized, with the crypto held in reserve exceeding the value of the stablecoins issued.

The fully decentralized DAI stablecoin is pegged to the dollar, with its value ultimately underwritten by crypto deposits.

Algorithmic stablecoins

These stablecoins may not have a reserve at all.

They can be governed solely by an algorithm – for instance, for adjusting the currency supply.

If the coin is trading under its target value, the algorithm automatically burns coins from the supply.

If the coin is trading over its target value, the algorithm automatically mints coins to the supply.

So far, this approach is still to prove reliable, with Terra’s unbacked UST stablecoin imploding dramatically earlier in the year.

Tether (USDT)

Launched in 2014, Tether (USDT) is one of the oldest and most popular stablecoins. It is collateralized by both fiat and crypto deposits.

As of May 2022 it was the third largest cryptocurrency behind Bitcoin and Ethereum and the largest stablecoin on the market.

It is owned by iFinex, the Hong Kong-registered company that also owns the crypto exchange BitFinex.

Tether issues tokens pegged to the US dollar, the euro, the offshore Chinese yuan and gold.

It’s been primarily used so far for traders to take advantage of arbitrage opportunities when the market price of cryptocurrency is different across two separate exchanges.

USD Coin

Launched in 2018, USD Coin (USDC) is pegged to the US dollar and managed by well-known cryptocurrency firms, Circle and Coinbase, through the Centre Consortium.

As of July 2022, USD Coin was the fourth largest cryptocurrency in the world by market cap.

How can you buy stablecoins?

Stablecoins are available on the Nash app and they are incredibly simple to buy.

Just choose “Buy/Sell”, select the stablecoin of your choice and the blockchain you’d like to trade on.

Once your payment is complete and your stablecoins arrive, you can start exploring decentralized crypto trading.

Get the Nash app here.

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