Stable coins are cryptocurrencies that are tied to a stable asset such as the US Dollar to decrease volatility. This is done by issuing stable coins in a 1:1 ratio to the underlying stable assets. It means that for every stable currency issued, there will be an equivalent amount of stable assets in reserve.
Stable coins have the main advantage of being stable. They offer the benefits of cryptocurrency such as fast and inexpensive transactions without the volatility that can make it difficult to use them as a reliable store or exchange medium. They are therefore attractive for payments, remittances and as a hedge against fluctuations in the cryptocurrency market.
Here are five examples:
- Tether (USDT – Tether, a stable coin pegged to US dollars, is one of most commonly used stable coins on the market. Tether Limited issues it. This company claims to have a reserve of US$ to back all Tethers in circulation. Tether can be traded on cryptocurrency exchanges and issued on different blockchain platforms including Bitcoin’s Omni Layer, Ethereum and Bitcoin.
- USDC – USDC, which is a stable currency issued by Circle, a financial service company, is pegged to US dollars. It can be used to pay, receive remittances and store value. The key difference in USDC is its transparency and auditability. Regular audits are conducted to ensure that USDC’s reserve of US Dollars is adequate to support it in circulation.
- DAI – The DAI stable coin is pegged to US dollars, but it is also unique in that it’s a decentralized stable currency, which means it’s not issued by a central authority. It is created by a process known as “collateralized loan issuance” where users can use assets such as Ethereum to secure DAI. An automated system adjusts supply and demande based on the collateralization of the assets backing the DAI to maintain its value.
- PAX – Paxos, an international financial technology company, has issued a stable coin called PAX. It is tied to the US Dollar. It can be used to make payments, remittances and store value. PAX has a number of key advantages. It is fully regulated and supervised by the New York State Department of Financial Services. This adds credibility and oversight.
- BUSD – Binance is a cryptocurrency exchange that issues stable coins. They are pegged to the US Dollar. It can be used to make payments, remittances and store value. Binance, the most trusted and respected cryptocurrency exchange in the world, is backing BUSD, adding credibility.
In real life, stable coins can provide many benefits such as:
- Stable coins have lower volatility. They are tied to a fixed asset like the US dollar. This reduces price volatility commonly associated with cryptocurrency. They are therefore more useful as a medium for exchange and store of value.
- Transactions are quick and inexpensive: Cryptocurrencies have a reputation for being fast and affordable. Stable coins also offer the same benefits, but with the added benefit of addressing price volatility. They are therefore attractive for transactions such as payments or remittances where speed and low fees is important.
- Access to cryptocurrency-based financial services: Stable coins may allow you to access financial products built on top cryptocurrency platforms such as Decentralized Finance (DeFi) applications. These products offer potential attractive returns and can easily be accessed anywhere with an internet connection.
- Market fluctuations can be hedged: Stable coins are a good way to hedge against volatility in the cryptocurrency market. An investor might hold a portfolio of cryptocurrency and be concerned about potential market declines. To protect themselves, they could convert some of these holdings to a stable currency.
- Financial inclusion: Stable currencies can help improve financial inclusion, especially in countries with a poor financial infrastructure or restrictions on capital flow. Individuals who might not have been able to access financial services previously may be able to access them.
Stable coins can be a viable solution to reduce volatility and make them more accessible for payment and remittances. It is crucial to evaluate the issuing entity as well as the assets that back the stable coin. There have been cases where stable coins have lost their pegs or faced questions about their integrity.