That provides an entrypoint into the world of DeFi, with possibilities including faster money transfers, access to financial services without applications, keeping financial data private and avoiding financial service fees. Centralized stablecoins provide a digital option with the backing of a traditional currency. Stablecoins have become a popular option for consumers wanting to own cryptocurrencies but who also desire the stability and predictability of fiat currencies. As of writing this article, the stablecoin market is worth nearly 140 billion U.S. dollars. The stablecoin with the highest market capitalization value is Tether, which is pegged to the U.S. dollar as its fiat-backed currency. Tether has a total market value of just over 66 billion U.S. dollars.

What is an example of stablecoins?

A stablecoin is a cryptocurrency that is designed to make transacting with crypto more practical. Currently, cryptocurrencies are volatile and can experience dramatic price fluctuations in a short period of time. Bitcoin, for example, can rise or drop by double-digit percentages in just a few hours. Stablecoin advocates believe these cryptocurrencies are critical for bridging “real-world” assets like fiat currencies with digital assets on the blockchain. Others are skeptical, noting that they’ve played major roles in the collapse of several cryptocurrencies and crypto institutions.

• This means it’s often tricky for investors to swiftly cash out their cryptocurrencies when the going gets tough.
• “For example, if you are not licensed and if you are actively marketing into Hong Kong, there will be restrictions and extra territorial application of the regulatory regime,” he explained.
• Tether (USDT) is one of the oldest stablecoins, launched in 2014, and is the most popular to this day.
• The borderless, censorship-resistant nature of cryptocurrencies is frequently at odds with the existing financial framework, and some backlash is to be expected.
• The situation gets even more unmanageable for rare or one-off purchases of high value goods.
• Or some keep part of the funds in fiat currencies and invest the rest of the collateral.

Crypto at Fidelity

For example, for each unit of Tether (the currency) in circulation, there is a corresponding US dollar in Tether’s (the company) account. That’s why most people would be unwilling to spend bitcoin, and most merchants would not take bitcoin as payment today. If you switched to buying your €3 coffee in bitcoin every morning then its what is a stablecoin price would be constantly changing. “In my view, the only really acceptable answer is with an independent audit,” says Brody. “Not only do you need to know what assets are backing a particular token — if it’s an asset-backed token — but you also need the assurance that those assets are not pledged against other liabilities.”

Stablecoins in a nutshell

• “While investing their dollar reserves can increase profits, it also increases the risk of a (bank) run, and not having sufficient liquid reserves to meet redemptions in response to an investor panic,” Natraj says.
• Stablecoins are used as a hedge against the volatility of other cryptocurrencies, as a means of exchange, and also as a way to store value.
• Fidelity cannot guarantee that the information herein is accurate, complete, or timely.
• Although not to the same extent as TerraUSD, investors worried about the reliability of reserves and whether Tether was fully collateralised.
• $5 worth of bitcoin may be worth $5 at the time of the transaction, but by the time you walk out of the coffee shop, that $5 could be worth $4 or $6.

However, there’s a risk that the stablecoin issuer doesn’t actually have enough reserves. Yet because they hew to the value of a single fiat currency, they act as a sort of temporary refuge for investors looking to secure their funds during a bear market. In this way, stablecoins are like blockchain-enabled versions of the dollar. Some of the main risks with algorithmic stablecoins are smart contract risk and algorithm risk.

These utility benefits may include fast and straightforward international money transfers without the expensive fees charged by banks. Stablecoins are typically pegged to a currency or a commodity like gold, and they use different mechanisms to maintain their price peg. The two most common methods are to maintain a pool of reserve assets as collateral or use an algorithmic formula to control the supply of a coin.

You can use Arkham’s platform to find basic information on stablecoins. You can also use Arkham to track the inflows and outflows of stablecoins from different addresses, their movements, and who holds the most of each. This captures what is called the basis, which is “the difference between the spot price of a commodity and a futures contract that expires two or more months later” (Investopedia, 2024). If you’re https://www.tokenexus.com/ unfamiliar with shorting, you can read our article on derivatives trading. This algorithm, or ruleset, allows the coin to be delta neutral – or, in other words, relatively stable, but with no guarantees. This route would then involve a series of steps and various fees and often take a few business days to complete, as opposed to a stablecoin transfer which would be instant and come with low, or zero, fees.

Stablecoin collateral

To be sure, one should always see what is accepted as collateral in a protocol. For example, liquid-staking tokens like Lido Staked Ether (stETH) may be accepted as collateral in some protocols. This means that a user’s token can be earning yield while it’s being borrowed against. However, if stETH de-pegs from ETH on the downside, the protocol will require the user to add more collateral to be added, if the user has not already been liquidated. For example, a protocol might accept Bitcoin or Ethereum as collateral, then allow the user locking those coins to mint stablecoins against their deposit. In order to unlock that collateral, the user must repay the amount of coins borrowed, plus any relevant fees.

What Are Stablecoins and How Do They Work?