Learn about our editorial policies What Are Stablecoins? Stablecoins are cryptocurrencies whose value is pegged , or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin BTC , which has made crypto investments less suitable for common transactions. Key Takeaways Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference.

Stablecoins are more useful than more-volatile cryptocurrencies as a medium of exchange. Stablecoins may be pegged to a currency like the U. Stablecoins pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that are supposed to control supply. Though Bitcoin remains the most popular cryptocurrency, it tends to suffer from high volatility in its price, or exchange rate.

All this volatility can be great for traders, but it turns routine transactions like purchases into risky speculation for the buyer and seller. Investors holding cryptocurrencies for long-term appreciation don't want to become famous for paying 10, Bitcoins for two pizzas.

Meanwhile, most merchants don't want to end up taking a loss if the price of a cryptocurrency plunges after they get paid in it. To serve as a medium of exchange , a currency that's not legal tender must remain relatively stable, assuring those who accept it that it will retain purchasing power in the short term.

As the name implies, stablecoins aim to address this problem by promising to hold the value of the cryptocurrency steady in a variety of ways. What Kinds of Stablecoins Are There? Some would argue that stablecoins are a solution in search of a problem given the wide availability and acceptance of the U. Many cryptocurrency adherents, on the other hand, believe the future belongs to digital tender not controlled by central banks.

There are three types of stablecoins, based on the mechanism used to stabilize their value. Fiat-Collateralized Stablecoins Fiat-collateralized stablecoins maintain a reserve of a fiat currency or currencies such as the U. Other forms of collateral can include precious metals like gold or silver as well as commodities like crude oil, but most fiat-collateralized stablecoins have reserves of U. Such reserves are maintained by independent custodians and are regularly audited.

Crypto-Collateralized Stablecoins Crypto-collateralized stablecoins are backed by other cryptocurrencies. Because the reserve cryptocurrency may also be prone to high volatility, such stablecoins are overcollateralized—that is, the value of cryptocurrency held in reserves exceeds the value of the stablecoins issued. Algorithmic Stablecoins Algorithmic stablecoins may or may not hold reserve assets.

Their primary distinction is the strategy of keeping the stablecoin's value stable by controlling its supply through an algorithm , essentially a computer program running a preset formula. In some ways that's not so different from central banks, which also don't rely on a reserve asset to keep the value of the currency they issue stable.

The success of crypto based coins led to the Federal Reserve to announce an investigation into its own digital coin along with the governments and central banks of other countries. Types of Stablecoins There are many different kinds of stablecoins, differentiated primarily by the asset that backs them.

Here are the major types: Commodity Backed Stablecoins Commodity-backed stablecoins are stabilized with hard assets such as gold or real estate. The most commonly used asset to collateralize stablecoins is gold, although many use diversified baskets of precious metals. Fiat Backed Stablecoins Stablecoins backed by fiat currencies like Chinese yuan keep a reserve of that currency as collateral.

Other forms of fiat include precious metals such as platinum or silver and commodities such as corn or oil. Most fiat backed stablecoins are backed with dollar reserves. The reserve for the currency is administered through an independent custodian that is audited on a scheduled basis to ensure compliance. Crypto Backed Stablecoins Crypto can back other crypto as well. Such is the case with crypto backed stablecoins. To counteract the higher relative volatility of backing stablecoins through crypto, the coin will maintain an overcollateralized position.

In other words, the stablecoin will circulate a much lower supply against the reserve as compared to fiat backed currencies. Siegniorage Style Stablecoins Siegniorage are governed through and backed by an algorithm or process rather than another asset or currency. The idea of siegniorage as backing came from a whitepaper from noted cryptographer Robert Sams, who puts forward the idea of a Federal Reserve coin fedcoin that could function as such.

With the number of stablecoins growing, it is good to have a grasp of the most useful and well anchored choices.

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Ethereum and what happens on the popular platform is of immense interest to the blockchain and cryptocurrency world because the vast majority of DeFi protocols and stablecoins now operate on Ethereum. ConsenSys is a blockchain software developer for Ethereum. Two of the biggest cryptocurrency trends of were the rise in decentralized finance DeFi and the growth of stablecoins. As of Jan. And the stablecoin population has evolved from formerly being mostly fiat-backed e. USDT , interest-bearing e.

DeFi has also become the topic of regulatory discussions. Decentralized exchanges DEXes like Uniswap surged in popularity in the middle of , leading to new inflows of value tokenized on Ethereum — from the wrapped tokens such as Wrapped Ethereum, Wrapped Bitcoin and decentralized storage network Filecoin , to increased demand from institutions and other blockchain-based protocols.

The report predicts that the momentum will continue, and more protocols will launch wrapped versions of their tokens on Ethereum in NFTs offer ownership rights for digital art , games and other virtual assets. Demand for stablecoins is high, so you can earn interest for lending yours.

Make sure you're aware of the risks before lending. Stablecoins are exchangeable for ETH and other Ethereum tokens. Lots of dapps rely on stablecoins. Stablecoins are secured by cryptography. No one can forge transactions on your behalf. The infamous Bitcoin pizza In , someone bought 2 pizzas for 10, bitcoin. Stablecoins solve this problem, so you can enjoy your pizza and hold on to your ETH.

Find a stablecoin There are hundreds of stablecoins available. Here are some to help you get started. If you're new to Ethereum, we recommend doing some research first.

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