Everything you need to know about stablecoins

Cheap money transfer. People have contributed up to $1 million to USDC for as little as $1 in transfer fees.
International shipping is available. Stablecoins like USDC are a fantastic alternative for sending money around the world due to their fast processing and cheap transaction fees.

Because their prices are pegged to a reserve asset such as the US dollar or gold, stablecoins bridge the worlds of cryptocurrencies and regular fiat money. Compared to Bitcoin, this significantly minimizes volatility, resulting in a kind of digital currency better suited for everything from day-to-day trading to facilitating transfers between exchanges.

The idea of ​​combining the stability of traditional assets with the flexibility of digital assets has proven extremely appealing. Stablecoins like USD Coin (USDC) have attracted billions of dollars in value, becoming one of the most popular ways to store and transfer wealth in the crypto ecosystem.

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How important are stablecoins?

The USDC stablecoin, for example, is backed by dollar-denominated assets in segregated accounts with regulated financial institutions in the United States whose fair value is at least equal to that of the outstanding USDC. An independent accounting firm certifies (ie publicly verifies) these accounts.

USDC, like many other stablecoins, is currently decentralized on the Ethereum blockchain. Stablecoins lack the volatility of unindexed cryptocurrencies while retaining some of their most powerful characteristics:

  • Stablecoins are open, worldwide and available to anyone on the internet at any time.
  • They transport data quickly, cheaply and securely.
  • They are digitally native to the Internet and can be programmed.

What can stablecoins be used for?

Reduce volatility. The value of cryptocurrencies such as Bitcoin and Ether changes drastically, sometimes even by the minute. An asset tied to a more stable currency can give buyers and sellers confidence that the value of their tokens will not rise or fall unexpectedly in the near future.

Assets can be traded or saved. Stablecoins do not require a bank account and are simple to transfer. The value of stablecoins can be easily transferred around the world, especially in areas where the US dollar is hard to come by or the local currency is unstable.

Earning Interest There are simple ways to earn interest on a stablecoin investment that is often higher than what a bank would offer.

How does stablecoin work?

There are two types of stablecoins: those backed by reserves of assets such as fiat cash, bonds, treasury notes, or even other crypto tokens, and those that are algorithmic or “decentralized.”

Tether, USD Coin, and Binance USD are reserve-backed stablecoins: they claim to hold enough dollar-denominated assets to maintain a 1:1 exchange rate.

According to the companies, one of their stablecoins can always be exchanged for a dollar.

Asset-backed stablecoins have come under fire in recent years for failing to be honest about their reserves and whether they have enough funds to back up all the digital coins in circulation. TerraUSD, on the other hand, is an algorithmic stablecoin.

This suggests he has no reservations. Instead, its value was supposed to be maintained by a complex mechanism involving the exchange of TerraUSD coins for a floating cryptocurrency known as Luna to control supply.

Are stablecoins actually stable?

Crypto's Audacious Algorithmic Stablecoin Experiment Collapses |  New technics

HT technology

Stablecoins have been heralded as safe and predictable by cryptocurrency producers, but as investors discovered this month, that’s not always the case.

Despite being pegged to the US dollar, the terraUSD stablecoin fell to $0.77 this week. Another dollar-backed stablecoin, Luna, broke below $1 on Wednesday evening, while Tether fell to $0.95 on Thursday.

Some investors were so angered by the depreciation of their stablecoins that they launched a lawsuit against Coinbase on Thursday. The case revolves around the stablecoin GYEN, which is pegged to the Japanese yen.

“At the same time, the value of GYEN fell to ankle again, dropping 80% in one day.”

Why do some stablecoins lose value?

Stablecoins were hit by greater cryptocurrency selling, which accelerated shortly after the Federal Reserve raised interest rates by half a percentage point. Higher interest rates, coupled with rising inflation and supply chain issues, are raising fears among investors that the US economy could collapse in the near future.

As economic uncertainty increases, many investors have shifted their portfolios away from riskier assets, such as stablecoins and other cryptocurrencies. According to data from CoinMarketCap, the price of major cryptocurrencies fell between 5% and 85% in the past week.

What are government watchdogs worried about?

Stablecoins have been at the forefront of conversations among American politicians about how to govern the booming cryptocurrency market.

Stablecoins, in particular, require oversight due to their growing popularity and the fact that “they are backed by assets that can lose value or become illiquid in times of stress,” making them “liable to run “, according to Federal Reserve research published on Monday. . In the financial industry, a “race” occurs when all or most account holders withdraw their money at once because they think the institution won’t be around for long.

According to the Fed’s analysis, the stablecoin industry is “extremely consolidated”, with the three largest stablecoin issuers – Tether, USD Coin, and Binance USD – accounting for over 80% of the total market value.

On Monday, US Treasury Secretary Janet Yellen echoed the call for stablecoin regulation, highlighting how quickly a price drop could affect investors.

“A stablecoin known as TerraUSD has had a run and its value has plummeted,” she told the Senate Banking Committee on Tuesday. “I think it just shows that this is a rapidly developing product with financial stability issues, and we need a proper structure.”

Types of Stablecoin Collateral

Stablecoins under this architecture come in a variety of varieties, and guaranteed stablecoins use a variety of assets as backing:

  • Fiat: The most common collateral for stablecoins is fiat. The US dollar is the most widely used fiat currency, but companies are now looking at stablecoins linked to other fiat currencies, such as BiLira, which is linked to the Turkish lira.
  • Precious metals: The value of many cryptocurrencies is tied to the value of precious metals like gold or silver.
  • Cryptocurrencies: Some stablecoins even use other cryptocurrencies as collateral, such as ether, the native token of the Ethereum network.
  • Other investments: Tether’s USDT was previously supposed to be backed 1:1 with dollars, but its collateral composition has varied over time, and the company has revealed that around half of its reserves are made up of commercial paper, a type of short-term corporate debt, in a 2021 blackout. The issuers of this document have not been identified, but it is stated that they are all rated A-2 or better (A- 2 is the second best rating that can be achieved by a corporate borrower from rating agencies such as Standard & Poor’s). Circle’s USDC, similarly, puts unnamed “permitted investments” next to accounts at federally insured banks in its monthly disclosures (note that it doesn’t say whether the accounts themselves are insured) .

Do stablecoins have any drawbacks?

What is a Stablecoin?  - Simplecryptoguide.com

simplecryptoguide.com

There are a few downsides to stablecoins to consider. Stablecoins have different weak points than other cryptocurrencies due to the way they are normally set up.

If reserves are held with a bank or other third party, another risk is counterparty risk. It boils down to whether the entity has the security it claims to have. Tether, for example, has been repeatedly questioned whether it maintains true 1-1 support between USDT tokens and US dollars.

In the worst case, the reserves backing a stablecoin may be insufficient to redeem every unit, thereby undermining trust in the coin.

Cryptocurrencies were designed to replace the intermediary organizations that a user’s money has traditionally been entrusted to. Intermediaries, by definition, control this money; for example, they can usually prevent a transaction from taking place. Some stablecoins bring back the option to stop transactions.

The USD currency openly features a backdoor to block payments if the coins are used illegally. Circle, one of the companies that created the USDC, confirmed in July 2020 that it had frozen $100,000 of the stablecoin at the request of law enforcement.

Is each stablecoin linked to a national currency?

The most popular stablecoins are now pegged to the US dollar, just as the US dollar acts as a reserve currency for governments around the world. A single unit of tether, USD coin, or Binance USD is worth around $1.

The underlying asset, however, does not have to be a national currency. The asset can be a commodity like gold (as with kitco gold), an algorithm like dai, or even another cryptocurrency like bitcoin (bitUSD).

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