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What are stablecoins for and how stable are they?


what is a stablecoin

Experts say the DAI stablecoin is overcollateralised, which means that the value of cryptocurrency assets held in reserves might be greater than the number of DAI stablecoins issued. 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 attempt to maintain a pool of reserve assets as collateral or use an algorithmic formula to control the supply of a coin. For centralized issuers, this desire to make money leads to the controversy surrounding the transparency of reserves, as discussed above.

For each USDT stablecoin issued, Tether kept 1 US dollar in reserve. The goal was to keep the USDT price stabilized at approximately $1. Each USDT token can be exchanged for one US dollar locked in the reserve. USDT started slowly but took off during the 2017 Bitcoin bull run, when its total supply reached almost 10M.

What is a stablecoin’s role in the future of crypto?

Tether critics have argued that the stablecoin isn’t backed by the real US dollar and USDT tokens are conjured out of thin air. USDT was initially developed to use the Bitcoin blockchain (Omni and Liquid Protocol) as its transport protocol, allowing transactions of tokenized fiat currencies. However, Tether tokens currently use multiple protocols, including Ethereum, Algorand, Bitcoin Cash, EOS, Tron, and OMG. Since the original Tether protocol uses the Bitcoin network, it inherits the security and stability of the Bitcoin blockchain.

  • 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.
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  • Stablecoins have a market cap of around $170 billion, making them a relatively small part of the overall cryptocurrency market, which is currently worth around $1.2 trillion, according to CoinMarketCap data.
  • In 2020 alone, the supply of stablecoins has jumped from $5 billion to $23 billion.
  • There has long been controversy about the reliability of the collateralising reserves regarding certain stablecoins (i.e., that the stablecoin’s liabilities are higher than its reserves).
  • In fact, stablecoins are specifically designed to maintain a fixed price.

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. On the other hand, decentralized stablecoins have revenue modes that vary from protocol to protocol.

Fiat-collateralized stablecoins

The biggest example in this category is the DAI (DAI) algorithmic stablecoin, which is pegged to the U.S. dollar but is backed by Ethereum and other cryptocurrencies. As crypto adoption continues to grow and further utility is rolled out, stablecoins will play an ever-increasing role in the industry. Stablecoins provide the perfect blend of a stable-priced asset that benefits what is a stablecoin from blockchain technology. Stablecoins are a crucial part of the crypto ecosystem and without them, cryptocurrency would not be where it is today. Stablecoins bridge the gap between TradFi and DeFi and are necessary for liquidity and increasing global crypto adoption. Users can buy stablecoins and other crypto assets on SwissBorg with a bank card or bank transfer.

In addition, Tether is a centralized cryptocurrency whereas Bitcoin is decentralized. Stablecoins remain a popular choice among crypto traders, and Tether weathered controversies about liquidity and the adequacy of its reserves. Treasurys, [Tether] stands a far better chance of weathering the current tsunami rocking the digital asset world,” says Marc LoPresti, managing director of The Strategic Funds. He says the only stablecoin with comparable collateral quality is USD Coin.

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Dai (DAI) is the fourth largest stablecoin by market cap and is pegged to the U.S. dollar on a one-to-one basis. Unlike the three stablecoins mentioned above, DAI is not backed by U.S. dollars but by a combination of various crypto assets. The move marks a significant step for a traditional financial institution into a part of cryptocurrency trading currently dominated by specialist digital assets firms.

what is a stablecoin