For those who are just beginning to explore cryptocurrencies, the crypto universe can seem inscrutable and full of mystery. However, there is one “cryptocurrency” that acts as a bridge between traditional finance and the new digital world: stablecoins. Let's break down what they are and why they are so important for beginners.
What is a stablecoin?
Stablecoin is a cryptocurrency whose rate is set according to the value of a certain underlying asset, in most cases the US dollar. This approach gives stablecoins the ability to keep their rate stable, as opposed to the sharp price fluctuations that characterise cryptocurrencies such as Bitcoin and Ethereum. The main goal of stablecoins is to reduce these fluctuations. But how exactly is this achieved?
Asset-linked: Most steblecoins are linked to specific assets, most commonly fiat currencies such as the US dollar or the euro. For example, one stablecoin can be equivalent to one US dollar. This peg is backed by the asset reserves that support the issuance of the steblecoin.
Collateral Mechanisms: There are different ways of securing the value of Stablecoins. Some of them are:
Centralised reserves: As mentioned, some stablecoins, such as USDT or USDC, maintain their value by providing each token with real cash reserves in a bank account.
Collateralisation by cryptoassets: Other stablecoins, such as DAI, use collateral in the form of other cryptocurrencies to maintain their value. Using complex smart contracts, these systems automatically adjust the level of collateral to keep the token's value stable.
Algorithmic regulation: Some stablecoins have no reserves or collateral, but instead use algorithms to automatically regulate the volume of token supply in order to maintain a stable price.
Uses: Stablecoins can be used for a multitude of purposes, ranging from simple transfers to complex financial transactions. Because of their stability, they are ideal for commerce, transfers, store of value and use in decentralised financial applications.
Stablecoins seek to combine the advantages of cryptocurrencies (speed, security, accessibility) with the stability of traditional currencies. This makes them particularly valuable in the cryptocurrency space.
USDT (Tether)
USDT, or Tether, was one of the first stablecoins on the market. Its value is pegged to the US dollar at a 1:1 ratio.
Each USDT token issued is backed by a US dollar held in Tether Limited's reserves.
Tether is widely used on various cryptocurrency exchanges for trading and as a means to transfer funds between exchanges.
Features and Risks: Some critics point to a possible lack of collateralisation and lack of transparency in Tether's audit. However, USDT is still one of the most popular stablecoins.
USDC (USD Coin)
USDC is a digital dollar created by Circle and Coinbase.
Similar to USDT, each USDC token is backed by a 1:1 US dollar that is held in reserves and audited regularly.
USDC is often used on cryptocurrency trading platforms as well as decentralised financial applications (DeFi).
Features and Risks: Unlike USDT, USDC is typically associated with a greater degree of transparency and regulation due to the involvement of leading companies in the creation of the token.
DAI (MakerDAO)
DAI is a unique decentralised stablecoin that does not depend on central currency reserves.
DAI maintains its value using a system of smart contracts on the Ethereum platform and various types of collateral assets.
DAI can be used for buying, investing and in other DeFi applications.
Features and risks: Unlike USDT and USDC, DAI is backed by collateral from other cryptocurrencies rather than dollar reserves. This makes it less dependent on the traditional financial system, but may also introduce additional risks due to the volatility of the collateralised assets.
These stablecoins represent different approaches to creating stability in the cryptocurrency world. From centralised solutions like USDT and USDC to fully decentralised ones like DAI, they play a key role in the current cryptocurrency ecosystem.
The Future of Stablecoins
In a world where digital currencies are becoming increasingly popular, stablecoins play a key role in creating a bridge between the traditional and digital worlds. They are expected to evolve towards more sophisticated financial instruments, integration with traditional banking systems and possibly the creation of national digital currencies.
Stablecoins are not just another type of cryptocurrency; they are a tool that can make crypto more accessible and understandable for ordinary people. They offer stability in a volatile world and can serve as a gateway for those just beginning their crypto journey.
