Fiat currencies aren’t the only off-chain assets represented by on-chain stablecoins. Other assets include commodities such as gold (like Tether Gold and Paxos Gold) or stock-based tokens. The main advantage of stablecoins is that their prices, when working properly, maintain parity with the asset they’re pegged to. Cryptopedia does not guarantee the reliability of the Site content and shall not be held liable for any errors, omissions, or inaccuracies. The opinions and views expressed in any Cryptopedia article are solely those of the author(s) and do not reflect the opinions of Gemini or its management. The information provided on the Site is for informational purposes only, and it does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice.
Experts say the DAI stablecoin is overcollateralized, which means that the value of cryptocurrency assets held in reserves might be greater than the number of DAI stablecoins issued. Fiat currencies, https://www.xcritical.com/blog/what-is-a-stablecoin-and-how-it-works/ such as the U.S. dollar or the British pound, don’t see this level of price volatility. So another way to think about stablecoins is as a tokenized version of a fiat currency.
Indeed, the Biden administration recently said that stablecoins could change how we pay for everything. As buying digitally becomes ever more embedded in our lives, stablecoins offer an affordable, stable, and easily accessible way for consumers and businesses to move value globally, today and in the future. From a financial standpoint, using stablecoins isn’t much different than using a gift card, Malekan says. You can use your dollars to purchase stablecoins and then use those stablecoins to buy different cryptocurrencies or make other online purchases. Asset-backed stablecoins might not actually hold enough assets to fully collateralize their outstanding coin balance.
Ian Katz, managing director of Capital Alpha Partners, told Reuters that PayPal USD could soon attract the attention of the Federal Reserve and the Securities and Exchange Commission. For now, PayPal is focusing on rolling out the new currency and all the things people can do with it in the US. A stablecoin is not a single crypto but a term for a group of cryptocurrencies. Stablecoins like TerraUSD (UST), as the name suggests, are intended to offer stability against the price fluctuations of the crypto market. In the case of TerraUSD, this is done by counteracting fluctuations using algorithms. You are a customer who paid in cryptocurrencies, and at the time of confirming your transaction with the merchant, the price of the digital currency has increased by 20%.
At the very basis of cryptocurrencies is the decentralization of money and a free-for-all payment system minus the volatility. Stablecoins were invented to fill this need and provide an important addition to the cryptocurrency marketplace. Stablecoins were created to provide stability, long-term purchasing power and the predictability of a fiat currency alongside the utility benefits of cryptocurrencies.
Despite the fact that stablecoins may be less volatile than other forms of crypto, they are still using newer technology which may have unknown bugs or vulnerabilities. And there’s always a chance that you could lose the private keys that give you access to your cryptocurrency, either through a hack or user error. 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.
DAI is widely available and can be accessed on 221 different exchanges. Instead of being backed directly by U.S. dollars like USDT, DAI uses smart contracts to lock up crypto assets like ETH, and generate tokens based on that collateral. It is a product of the Maker Protocol, a decentralised application that runs on the Ethereum blockchain. As with all innovative technology, stablecoins do pose risks, especially as we wait for clear legislative guidance from regulating bodies and governments on their application in day-to-day payments. If a stablecoin’s reserves are stored with a bank or third party, we must also consider counterparty risk. These third-party entities have control over the reserve assets, creating the risk of inefficient use of capital and subsequent price volatility or instability.
„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.“ Each stablecoin project has developed its own mechanism, but they generally boil down to four basic models. There are many ways for investors to bet against Bitcoin and Ether and sell them short.
As of late July 2023, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $83 billion. Even if a stablecoin’s monetary value is pegged to a given currency, it may not be recognized as a legitimate form of payment by government or commercial entities. Cryptocurrencies are typically much more volatile than traditional assets such as stocks, commodities or currencies. For example, in May 2017, Bitcoin reached a price of $2,000 but then skyrocketed to an eye-popping $19,000 by December 2017. In 2020 as the world entered Covid lockdowns, Bitcoin’s price was around $7,000 but then skyrocketed again to over $19,000 by November 2020. On the other hand, decentralized stablecoins have revenue modes that vary from protocol to protocol.
These specific Stablecoins allow holders to participate in the gold market and have the utility benefits of a cryptocurrency without the challenges of physically owning gold bars. At a market cap of $66.9 billion, USDT is currently the third biggest cryptocurrency, behind Bitcoin and Ethereum (ETH). However, it has been besieged by doubt around the reliability of its reserves for years. USDC is a stablecoin outlier https://www.xcritical.com/ in disclosing precise data regarding its assets and liabilities. There has long been controversy about the reliability of the collateralizing reserves regarding certain stablecoins (i.e., that the stablecoin’s liabilities are higher than its reserves). The main question is whether stablecoin operators hold sufficient cash reserves to meet their promise of a one-to-one exchange of value with the dollar.
To purchase DAI, users may use any major exchange, like Coinbase and Gemini. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. This coin is continually audited which is a plus and also coinbase being one of the creators, it’s easily redeemable. Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.