What are Stablecoins?
Stablecoins play a vital role in the crypto world.
THE SHORT ANSWER:
Stablecoins are a type of cryptocurrency whose price is tied to the value of something else, like the US dollar or bars of gold. They are used as forms of payment in the crypto space.
THE SLIGHTLY LONGER ANSWER:
No matter how much you know about cryptocurrency, you probably know their prices have a tendency to go up, then down, then up again. This fluctuation is called volatility.
And while volatility is normal to long-time crypto investors, it’s not an ideal feature for a form of everyday money.
Can you imagine if your coffee cost $3 one day, and $14 the next?
Stablecoins are an attempt to get the best of both worlds: combining the flexibility, liquidity, and privacy of a digital asset with the price stability of fiat (“real world”) currency.
To understand this, let’s look at one of the most popular stablecoins: USDC. USDC tokens are tied to the value of the US dollar. When you buy 1 USDC, you can always exchange it for $1.
1 USDC token will never be worth $2. It will never be worth $0.50. Its price is stable.
For people trading crypto, this has a lot of advantages.
Let’s say you made some profit on your Bitcoin and are looking to cash out. You could trade your Bitcoin for cold hard US dollars. But getting that sent to your bank account takes days. If you need to send money abroad, it takes even longer. Sending cash quickly requires a Wire, but you have to wait till the bank opens and pay hefty fees. Sending crypto, however, is fast, cheap, and available 24/7. If only there were a way to transfer your assets without having to worry about price volatility…
So instead, you trade your Bitcoin for a dollar-pegged cryptocurrency, like USDC. You get the exact same return value as if you sold it for cash—but because it’s a digital asset, your funds are available almost immediately, you can use it to pay for things, and it’s ready to be reinvested in another token.
There are numerous stablecoins, but they can generally be categorized into three groups.
The first is fiat-backed: Coins like USDC are tied to the value of a traditional currency like the US dollar. These coins are backed by huge currency reserves held by the company issuing the token. Each USDC is backed by $1, so it’s sort of like an IOU: you give us a dollar, we’ll give you a token.
The second is commodity-backed: Coins that hold their value due to one or more commodities. Tether (USDT) is one example. Tether’s value is held stable by a basket of assets, including real estate, loans, and even US currency.
The third is algorithmic. Algorithmic stablecoins are powered by smart contracts that use supply and demand to keep the coin’s price close to $1. If demand starts pushing the price too high, the algorithm automatically mints more tokens to increase supply. If the price starts getting too low, the algorithm burns tokens to decrease supply.
In a crypto economy that’s ever-fluctuating, stablecoins have an important role to play. They help minimize volatility, provide ways to store value on-chain, and allow you to send money around the world for cheap.
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