One kind of cryptocurrency that is intended to keep its value constant over time is a stablecoin. A stablecoin’s value is often tied to a certain real currency, frequently the US dollar. In this scenario, one cryptocurrency unit often equals one unit of fiat money. Stablecoins’ prices are not intended to vary, in contrast to extremely volatile cryptocurrencies like Bitcoin.
However, recent developments in the stablecoin market, specifically the collapse of TerraUSD, have federal regulators actively monitoring this space. Stablecoins pose dangers to overall financial stability, according to Secretary of the Treasury Janet Yellen, and the Federal Reserve recently released a paper on the subject that discussed the lack of regulation and ambiguity surrounding the stablecoin market.
What are stablecoins and how do they operate?
A stablecoin is a cryptocurrency whose value is tied to a different asset, typically another cryptocurrency or a currency like the U.S. dollar or the euro, though other assets are also feasible. Insofar as it is compared to the currency it is linked to, the value of this type of cryptocurrency coin is stable over time because it tracks the underlying asset. In practice, it is as though the underlying asset has become digital, such as a dollar.
Stablecoins are frequently backed by the particular assets they are linked to because their main purpose is to follow an asset. For instance, a reserve is often established at a financial institution that holds the underlying asset by the entity generating the stablecoin. So a stablecoin could produce 100 million coins with a set value of $1 each while also maintaining a reserve of $100 million. The real money can eventually be removed from the reserve if the owner of a stablecoin wants to cash out the coin.
The majority of cryptocurrencies, like Bitcoin and Ethereum, have no backing whatsoever, in contrast to this arrangement. These other cryptocurrencies, in contrast to stablecoins, see significant price swings as a result of traders looking to profit.
Many stablecoins are backed by tangible assets, but not all of them. Instead, these others maintain the price of the crypto coin at the predetermined value via technical means (such as eliminating some of the coin supply to generate scarcity). In comparison to stablecoins backed by assets, these are known as algorithmic stablecoins and can be riskier.
Which stablecoins are the most widely used?
Because stablecoins don’t provide the same kind of “get rich quick” possibility as other cryptocurrencies, they often don’t receive as much coverage (or hype). But as of May 2022, the following handful are among the most well-known cryptocurrencies by market capitalization:
USDT Tether: $82 billion
Amount in USD Coin (USDC): $49.B
Dollars in Binance (BUSD): $17 billion
Of course, these coins are dwarfed by the biggest ones, like Bitcoin, which has a market cap of close to $560 billion, and Ethereum, which is worth more than $242 billion.
Another well-liked alternative was TerraUSD, an algorithmic stablecoin, but in May 2022 it lost its peg to the dollar. This stablecoin employed complex arbitrage techniques and other cryptocurrencies to keep its value at 1:1. However, the collapse of the cryptocurrency markets and the ensuing loss of faith in the stablecoin have caused its price to sharply decrease.
Which stablecoins are the most widely used?
Because stablecoins don’t provide the same kind of “get rich quick” possibility as other cryptocurrencies, they often don’t receive as much coverage (or hype). But as of May 2022, the following handful are among the most well-known cryptocurrencies by market capitalization:
USDT Tether: $82 billion
Amount in USD Coin (USDC): $49.B
Dollars in Binance (BUSD): $17 billion
Of course, these coins are dwarfed by the biggest ones, like Bitcoin, which has a market cap of close to $560 billion, and Ethereum, which is worth more than $242 billion.
Another well-liked alternative was TerraUSD, an algorithmic stablecoin, but in May 2022 it lost its peg to the dollar. This stablecoin employed complex arbitrage techniques and other cryptocurrencies to keep its value at 1:1. However, the collapse of the cryptocurrency markets and the ensuing loss of faith in the stablecoin have caused its price to sharply decrease.
