What are stablecoins?
January 23, 2025
The world of cryptocurrencies is full of volatility and unpredictability. Digital asset prices can soar upwards or fall downwards just as quickly. In this context, stablecoins act as a kind of "safe haven," offering stability in the turbulent crypto-sea. What are stablecoins, how do they work, and what advantages do they offer? We will talk about this in this article.
What are stablecoins?
Stablecoins are cryptocurrencies whose value is pegged to a stable underlying asset, such as a fiat currency (e.g., the US dollar), gold, or even other blockchain assets. Their main goal is to maintain price stability, which makes them convenient for use in everyday transactions and financial operations. Unlike traditional cryptocurrencies such as BTC and others, stablecoins have a predictable, stable value all the time without volatility.
How do stablecoins work?
Several mechanisms are used to maintain the stability of this type of asset:
- Peg to an underlying asset: their value corresponds to the value of an asset such as a fiat currency (e.g., $1).
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Reserve backing:
- Fiat-backed: For each stablecoin issued, an equivalent amount in dollars or another currency is held in reserve.
- Crypto-backed: These stablecoins are backed by other cryptocurrencies, usually with an additional reserve to compensate for volatility.
- Algorithmic: Maintain stability through mechanisms for automatic regulation of the coin supply, depending on demand.
Types of stablecoins
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Fiat-backed:
- Backed by real money held in bank accounts.
- Examples: USDT (Tether), USDC (USD Coin).
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Crypto-backed:
- Backed by cryptocurrency assets.
- Example: DAI, which uses ether as collateral.
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Algorithmic:
- Do not require reserves, as stability is achieved through algorithmic supply management.
Advantages
The advantages of stablecoins are that their price does not change and they are convenient for international transfers. In addition, stablecoins are useful for storing value in the crypto world and are actively used in decentralized finance for lending, trading, and other services.
Risks and disadvantages
However, like all assets, there are disadvantages. Fiat-backed stablecoins depend on central institutions (issuers). There is also a risk of loss of confidence if the issuers' reserves are insufficient, and governments of different countries may impose restrictions on the use of stablecoins.
Popular stablecoins
- Tether (USDT): The most popular stablecoin, backed by dollars. Despite criticism regarding the transparency of reserves, it remains the leader.
- USD Coin (USDC): A competitor to USDT with a better reputation regarding transparency and regulation.
- DAI: A decentralized stablecoin backed by cryptocurrencies.
- Others: BUSD (Binance USD), GUSD (Gemini Dollar).
How to use stablecoins for beginners?
We recommend using them as the main asset of a crypto portfolio to protect against the volatility of the crypto market. In addition to this, conducting international transactions with stablecoins is much faster and cheaper than through traditional banking systems with fiat currencies.
Advice from Kursoff: choose only verified stablecoins with a good reputation and transparent reserves.
Stablecoins and the future of finance
Stablecoins are becoming a bridge between traditional finance and the crypto world. They can play an important role in the global economy, especially with the development of central bank digital currencies (CBDCs). However, regulation and user trust are necessary for their sustainable development.
We have previously written about how stablecoin regulation is taking place in the EU. You can read more about this in the article "The impact of regulation on stablecoins".
Conclusion
Stablecoins are a convenient and stable tool that allows beginners to comfortably enter the crypto world. Their stability, accessibility, and wide use make them indispensable for many financial operations. Start by studying popular stablecoins such as USDT or USDC to safely begin your journey in the world of blockchain assets.