What is a stablecoin?

A simple approach to what stablecoins are

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Written by belo
Updated over a week ago

A stablecoin is a "stable cryptocurrency".

What does it mean? It keeps a stable price, perfect for those who prefer to avoid cryptocurrencies' volatility. It holds a fixed parity with another asset, commonly the U.S. dollar.

Do you go to sleep with the fear that bitcoin's price will fall?

Do you want to protect yourself from currency devaluation?

Does your bank restrict you from buying dollars?

Stablecoins are definitely for you

Are you buying dollars then?

No, it's even better:

- You have no maximum purchase limits

- You don't need a bank account, nor a bank to store your funds.

- It's definitely safer than having cash at home.

And what is their backing? How do you ensure their value is stable?

Stablecoins have different ways of guaranteeing that they are stable. The most common ones have collateral: assets or traditional currencies that are deposited in a fund and act as a backing.

For example: a user deposits a dollar as collateral, allowing a smart contract to issue a USDC (USD Coin) token. Similarly, when seeking to withdraw the deposited dollar, the issued token will be burned, going out of circulation and allowing the amount of USDC to be equivalent to the money that functions as a backup.

The collateral can also be composed of crypto, as in the case of the DAI stablecoin. In turn, there are also others whose parity is based on algorithms and are not backed by other assets.

Most popular stablecoins

  • USDC: tied to the US dollar, it was developed by Circle and Coinbase and is periodically audited to ensure its transparency.

  • DAI: also tied to the dollar, although with collateral exclusively in crypto. Its strength is its decentralization: its functioning is governed by a Decentralized Autonomous Organization (DAO).

  • USDT: created by the Tether company, it performs similarly to USDC. Every dollar deposited in Tether Limited accounts is converted into 1 USDT created digitally.

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