Stablecoins are different from traditional cryptocurrencies because they’re backed by a reserve asset, such as the U.S. dollar or gold. In other words, they’re simply tokenized versions of the U.S. dollar, gold, or other reserve assets. This helps keep their prices stable, so they’re not subject to the same level of volatility as other cryptocurrencies. Stablecoins are a type of cryptocurrency designed to have a steady value over time relative to a reference asset, for example, the U.S. dollar. They can provide inclusive, broad access to the financial system, and can enable fast and efficient money movement.

what is a stablecoin

UST has grown massively in popularity among crypto investors because it is one of few genuinely decentralised stablecoins. Instead of using a custodial model like Tether, the supply of UST algorithmically changes based on information received from Terra’s native LUNA blockchain. Stablecoins are a type of digital currency designed to hold a constant value against a fiat currency.

Covering Crypto Livestream

FRAX, the stablecoin of Frax Finance, claims to be the world’s first fractionally backed stablecoin, with parts of its supply backed by collateral and parts of the supply algorithmic. What makes DAI different is that anyone can issue it (unlike centralized stables like USDT and USDC) since the MakerDAO is open-source and on the highly decentralized Ethereum blockchain. Minting and burning DAI occurs when users borrow funds and then repay their loans.

what is a stablecoin

While in most periods it may seem like stablecoins have limited risks, stablecoins may become the riskiest in a crisis when it ought to be the safest to own them. Unless a stablecoin commits to holding 100 percent (or more) of its reserves in cash, there’s no guarantee that the cash will be there to redeem coins. In this case, the value of stablecoins may prove to be a lot less than stable. Holders of stablecoins may end up on the losing end of an old-fashioned bank run, a surprising fate for a technology that markets itself as highly modern. Once thought to be fool-proof digital equivalents, the last 12 months have highlighted a handful of major drawbacks to stablecoins.

How Stablecoins Make Money

As the name suggests, crypto-collateralized stablecoins are backed by cryptocurrencies (usually ETH), rather than fiat currencies. Instead of relying on a central issuer to store the reserve, crypto-backed stables use smart contracts to secure assets as collateral. This means that for every $100 of DAI you wish to borrow, you must back it with $200 worth of ETH. This allows ETH to maintain its peg even during times of intense market volatility. This category uses Seigniorage-style stablecoins to maintain the price stability of a token pegged to an asset.

what is a stablecoin

TrueUSD is a fully collateralized, transparently verified, and legally protected ERC-20 token pegged to the US dollar. The stablecoin was launched in 2018 as part of the TrustToken asset tokenization platform. TrueUSD holds collateral in bank accounts of fiduciary partners that have signed escrow agreements. These bank accounts are subject to monthly audits to ensure trust in TrueUSD. USDC is traded on Coinbase, Poloniex, Binance, and other major exchanges like Huobi and Serum Dex.

Bitcoin SV

Holders of commodity-backed stablecoins can redeem their stablecoins at the conversion rate to take possession of the backing assets under whatever rules as to timing and amount are in place at the time of redemption. Maintaining the stability of the stablecoin is the cost of storing and protecting the commodity backing. USD Coin was introduced in 2018 by Coinbase, the world’s first publicly-listed crypto exchange. USDC is currently the 2nd largest stablecoin by market cap, valued at $42.1 billion USD ($58.7 billion AUD). Generally speaking, the best stablecoins for investors are available on a wide range of exchanges and are backed by secure assets.

  • Meanwhile, Standard Bank Group, Africa’s largest bank by assets, also partnered with Hedera in 2021.
  • Entrepreneurs and institutions tried the idea of creating a digital dollar and initiated the journey by launching BitUSD.
  • In periods of uncertainty or crisis, the lack of demand for a digital asset can cause it to lose tremendous value in a short amount of time.
  • It will gradually be available to PayPal customers in the United States.
  • The current methods are not only costly but also take days to clear a single international payment.
  • We break down the different types of this emerging investment and explain its risks.
  • Since its inception, Bitcoin’s price has gone through significant highs and lows.

The stablecoin Tether has come under fire for its disclosures on reserves. And those who think the cryptocurrency is fully reserved by actual dollars should be careful. But recent events in the stablecoin market – namely, the plunge of TerraUSD – have federal officials looking closely at this area. The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives.