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What Are Stablecoins?

what is a stablecoin

USDC is a cryptocurrency insured by the Centre Consortium, a group of crypto-related companies that notably includes Coinbase and Circle. Despite launching in late 2018, USDC has captured a large share of the stablecoin market, thanks to its affiliation with leading crypto exchanges. To achieve such stability, the price of a stablecoin is often pegged to a real-world currency such as the US Dollar, British Pound, Japanese Yen, etc.

what is a stablecoin

Therefore, it is safe to conclude that DeFi has greatly increased the popularity of stablecoins. At the same time, the stablecoin issuer will publish periodic reports from trusted auditors, confirming that the amount being held in reserves is equivalent to or more than the coins in circulation. Ethereum-based stablecoins such as USDT and USDC are created using the ERC-20 token standard and then held at an address from which distribution takes place. The most common kind of stablecoins are those with their value pegged to fiat currencies.

Regulatory Outlook Report 2023

Funds received in any other currency will be converted at an exchange rate decided by our bank. Funds withdrawn by you to an account in a different currency will be converted at an exchange rate decided by your bank. Most stablecoins are currently minted by private companies, but this will change as central banks are introducing their own, known as CBDCs (central bank digital currencies). While many see bitcoin as digital gold, stablecoins and digital currencies are different.

  • If demand is less than supply, the laws of economics say the price will fall, and this has been a problem for some developers.
  • It’s why merchants can use stablecoins to accept payments at much lesser cost, and efficiently relay value among themselves anywhere in the world.
  • The Dai stablecoin for instance which is pegged to the US dollar uses a basket of crypto assets as collateral at a ratio of 150% of
    the value.
  • Confirm the number of coins in circulation from the cryptocurrency’s blockchain contract and compare the data with the amount of gold held in reserve by the custodian.
  • The merchant location address is located at Unit 5.25, World Trade Center, 6 Bayside Road, Gibraltar, GX11 1AA.
  • At the same time, stablecoins are emerging as a complement to existing payment ecosystems, with market capitalisation reaching around USD 190 billion in early 2022.”

Given this analytical framework, the question is if and how the MiCA considers the liquidity risk and hence the financial stability risk inherent to stablecoins. The analysis highlights that MiCA prioritises investor protection and regulatory competition at the expense of financial stability, despite claiming to achieve all of these goals. Maker, mentioned earlier, had over £7 billion worth of assets locked in its protocol to mint DAI tokens.

Crypto Center

Stablecoins are pegged against an asset or assets to minimize their volatility. Recently, Tron (TRX) launched an algorithmic stablecoin called USDD that operates in a very similar manner to that of TerraUSD (UST). But peg breaks have also occurred in fiat-backed and crypto-backed stablecoins too. In February 2023, stablecoin issuer Paxos was instructed to cease minting BUSD, the dollar-pegged cryptocurrency developed for premier cryptocurrency exchange Binance, by the New York Department of Financial Services (NYDFS). Theoretically speaking, when an algorithmic stablecoin loses its peg, arbitrage traders can step in to sell their stablecoins for a sister token, thus limiting supply and driving the price back to peg.

  • Therefore, it is safe to conclude that DeFi has greatly increased the popularity of stablecoins.
  • The idea is to remove price volatility that can plague unpegged cryptocurrencies like Bitcoin.
  • A stablecoin is a cryptocurrency whose value is pegged to the price of another asset, hence the term “stable.” For example, if functioning correctly a stablecoin pegged to the U.S. dollar should always be valued at $1.
  • HM Treasury’s response to the consultation was published in April 2022, outlining the government’s intention to bring stablecoins, when used as a means of payment, into the regulatory permitter.
  • There was not necessarily a unit of such said fiat currency parked in a bank account for every token issued as the tokens or currencies.
  • So called ‘unbacked’ crypto have no tangible assets that sit behind them.

Not all blockchain networks are as terribly inefficient as bitcoin, and to its credit, bitcoin is generally regarded as an asset or commodity, not a medium of exchange. Despite the name, cryptocurrencies don’t tend to make for a good currency. They’re volatile, not always liquid, difficult to use and can suffer from terrible transaction throughputs. “Over 80% of central banks are considering launching a CBDC or have already done so. In the UK, the Economic Affairs Committee of the House of Lords (Committee) declared CBDCs ‘a solution in search of a problem’.

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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. Decentralized stablecoins (or non-custodial stablecoins) can be further subdivided into algorithmic stablecoins, direct incentive stablecoins, and crypto-collateralized stablecoins. Poundtoken and are business names of Blackfridge SC Limited.