Stablecoins are a type of cryptocurrency pegged to an asset, such as the US dollar, whose value does not change significantly.

Most of the dozens of stablecoins in existence today use the dollar as a benchmark, but many are also pegged to other fiat currencies.Currencies issued by governments, such as the euro and yen. As a result, the price of stablecoins fluctuates very little, unlike high-profile cryptocurrencies like Bitcoin and Ethereum, which are prone to sudden ups and downs.

The first stablecoin created in 2014 was Tether, which is modeled after many other stablecoins. Users receive a token for every dollar they deposit , In theory, the tokens can be exchanged back into the original currency at any time, even at a one-to-one exchange rate.

As of July 28, 2021, about $62 billion worth of Tether was outstanding, or just over half the $117 billion market cap of all stablecoins worldwide , The next largest is known as USD Coin, which has a market cap of around $27 billion.

What are stable coins?

A stablecoin is a type of cryptocurrency that relies on a more stable asset as the basis for its value. Stablecoins are often referred to as being pegged to a fiat currency like the US dollar, but their value can also be pegged to precious metals or other cryptocurrencies.

Stablecoins are essentially a less volatile cryptocurrency with greater potential to resemble the types of coins people already use every day, digital currencies because crypto markets can be volatile,” said Doug Bonaparte, financial advisor and president of Bone Fide Wealth in New York.

All stablecoins are backed by one type of asset or combination of assets in a reserve; It could be gold, cash, or even short-term corporate bonds called commercial paper, The idea is that the money in the reserve acts as collateral for the stablecoin: every time a stablecoin holder redeems their tokens, an equal amount of assets are withdrawn from the reserve.

There are many different types of stablecoins, and they are not all created equal, Tether (USDT) is known as the first and largest stablecoin and was created in 2014,About 85% of Tether's assets are cash, cash equivalents, short-term deposits, and commercial paper, according to its website.

“USDT is owned by Tether, so Tether should have $1 on hand for each stablecoin,” Yang says, USD Coin is another popular stablecoin launched by Circle in 2018, USD Coin is pegged to short-lived Us.dollar and Treasuries with $49 billion in circulating supply, according to Circle.

Other stablecoins like Dai, Binance USD, and Terra USD are also popular but have smaller market caps and different reserve breakdowns.

Can you invest in stablecoins?

Stablecoins are used as a niche currency in the cryptocurrency world and are not a huge investment. They are more suited to digital transactions and the conversion of digital assets to and from “real” money.

Prices can go up or down very quickly, it can be easier, faster and cheaper to exchange coins for stablecoins instead of exchanging coins for real dollars in and out of your bank account , For example, you can quickly convert your bitcoin into stablecoins like USDT that are pegged to the US dollar and it would continue to live on the exchange you trade and retain its value.

You can then exchange these stablecoins for other coins. If you were to convert your bitcoin directly into Us.dollars, it could take longer to get into your bank account, effectively taking you off the crypto exchange. "You don't want to lose money by simply switching between two different currencies," says Bonaparte.

WHY STABLECOINS MATTER

Originally, stablecoins were mainly used to buy other cryptocurrencies like bitcoin, since many cryptocurrency exchanges did not have access to traditional banking , They are more useful than currencies issued by countries because you can use them anywhere, 24 hours a day, seven days a week.

the world without depending on the banks, Money transfers take a few seconds , Another useful feature of stablecoins is that they can operate on blockchains through so-called smart contracts, which, unlike traditional contracts, do not require legal approval to run.

The code in the software automatically determines the terms and conditions and how and when the money is transferred , This makes stablecoins programmable in ways that dollars cannot , Payments, insurance, prediction markets and decentralized autonomous organizations: companies that operate with limited human intervention , Collectively, these software-based financial services are known as decentralized finance, or defi.

Proponents argue that moving money through stablecoins is faster, cheaper, and easier to integrate into software compared to fiat currencies , Others say the lack of regulation poses major risks to financial systems.

In a recent article, economists Gary B. Gorton and Jeffery Zhang draw an analogy to the mid-19th century when banks issued their own private currencies.

They say stablecoins could lead to the same problems seen in the days when there were frequent runs because people couldn't agree on the value of privately issued coins , Concerned that stablecoins could pose risks to the financial system, regulators have also become more interested in them lately.