Stablecoins have become an integral part of the cryptocurrency market and are used by traders and investors every day. Stablecoins are especially useful for liquidating crypto into fiat currencies and are an integral part of the overall crypto and DeFi sector. If you’ve been wondering, What is a stablecoin? Then this article is for you. Let’s understand what a stablecoin is, how they work, and what they’re used for.
Contents:
- What is a stablecoin?
- What are the most popular stablecoins?
- How do stablecoins work: Centralized and decentralized
- What can the stablecoin market expect?
- Stably onwards
Interact with the underlined words and green dots to get additional details and explanations.
What is a stablecoin?
Stablecoins are cryptocurrencies whose exchange rate is pegged to other assets. The assets that stablecoins are pegged to tend to be fiat currencies, with the vast majority of stablecoins pegged to the US dollar in one way or another. This is generally reasonable, given that the US dollar accounts for the majority of Forex trading across the globe.
Cryptocurrencies with a fixed value are very convenient for trading and storing capital, as they facilitate instantaneous, borderless transactions without the involvement of a bank and protect crypto investments from the volatility that characterizes the crypto market.
Stablecoins — especially the top ones in terms of capitalization — are a very liquid asset. They are present in large numbers on almost any trading platform and most cryptocurrencies are paired with them. Olymp Trade is no exception — you can use a special USDT account for depositing and withdrawing funds.
To understand how stablecoins work, you first need to understand their types.
There is no single classification, but here a list of a few basic criteria:
- The asset being pegged to is in reserve. It can be fiat or cryptocurrency.
- Reserves can either partly cover the value of all tokens or exceed it.
- Centralized stablecoins use only reserves, while decentralized stablecoins use reserves and DeFi algorithms.
What are the most popular stablecoins?
In total, there are more than 100 different stablecoins.
Here is the top 10 stablecoins list by market capitalization:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- Dai (DAI)
- TrueUSD (TUSD)
- Pax Dollar (USDP)
- USDD (USDD)
- Neutrino USD (USDN)
- Fei USD (FEI)
- Gemini Dollar (GUSD)
It is worth noting that DAI may leave this list, as its creators plan to depeg it from the dollar in fall 2022. It is likely that other assets of this type will follow suit.
How do stablecoins work: Centralized and decentralized
1️⃣ Centralized stablecoins
The largest stablecoins are issued by centralized issuers. Let’s take Tether as an example, which issues USDT. In order to produce 1 USDT, a user needs to deposit $1 on Tether’s balance sheet. Conversely, when withdrawing into fiat, the USDT is burned and Tether sends the equivalent value in US dollars to the user.
Organizations like Tether are essentially a fund that holds reserves of assets and securities. Periodically, the fund is independently audited to confirm that the company’s reserves hold as much USD as it has USDT in circulation. In other words, the two currencies should always be exchanged on a ratio of 1:1.
2️⃣ Decentralized stablecoins
Decentralized stablecoins can be either collateralized by cryptocurrency or algorithmic, whereby the asset price is stabilized by algorithms matching supply to demand via DeFi assets. Both types often have cryptocurrency in reserves. A decentralized stablecoin’s algorithm is aided in maintaining stability by overcollaterization, where the cryptocurrency held in reserve exceeds the value of all the stablecoin’s tokens issued. Figuratively speaking, for $1 of algorithmic stablecoin, there can be $2 or even $3 worth of assets in reserves.
Right now, algorithmic stablecoins are being put to the test. In early May 2022, the UST from the Terra blockchain collapsed. It lost its peg to the dollar, after which the entire ecosystem almost ceased to exist within a matter of days.
What can the stablecoin market expect?
The collapse of Terra and the pressure of the US authorities on other algorithmic stablecoins puts the further development of this asset type in question. However, the cryptocurrency market has repeatedly found interesting technological solutions to continue operating.
Most likely, centralized protocols such as USDT and USDC will continue to be on the top of the market. Despite the tightening of regulations in the US and in some European countries, it is these companies that can comply with new requirements due to their centrality.
Stably onwards
While the state of the stablecoin market has been somewhat shaken this year, there will always be a need for these pegged assets. Still familiarizing yourself with the world of crypto? Check out our handy article on the major types of cryptocurrency you should know about. Those looking to trade on crypto or other assets on Olymp Trade can make deposits and withdrawals in USDT. It’s the easiest way to keep your profits liquid after trading on crypto. So, what are you waiting for?
Deposit USDTRisk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
