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What is a stablecoin?

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A detailed comparison of stablecoins and how they work.

Bitcoin and nearly all other cryptocurrencies are infamously volatile, capable of experiencing double-digit price swings in less than 24 hours. While this is an attractive feature for speculators looking to profit from price movements, it also remains one of the biggest barriers to the widespread adoption and legitimacy of cryptocurrency.

Enter stablecoins. These fixed-price digital currencies provide stability and a much wider range of everyday use cases than cryptocurrencies currently enjoy, and there are now more than 50 stablecoin projects being developed around the world.

Keep reading to find out how stablecoins work, the benefits they offer and why they’re important.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

What are stablecoins?

A stablecoin is a cryptocurrency with a fixed price. While the price of most cryptocurrencies is determined by supply and demand, stablecoins are designed to achieve a constant, stable price.

The most common method stablecoins use to achieve price stability is to peg the value of their coin to a real-world asset, for example gold or the US dollar. However, there are also a couple of other approaches for designing stablecoins, and we’ll explore all the options in detail a little further down the page.

Compare stablecoins side-by-side

Coin name Issued by Launched Type of stablecoin Features
AAA Reserve Arc Fiduciary Ltd 2017 Fiat backed Backed by cash, gilts and AAA-rated credit investments
AUDRamp (AUDR) OnRamp Technologies 2018 Fiat backed Backed by and pegged to AUD
A-Euro Augmint Not yet launched Crypto backed Pegged to EUR and backed by ETH
Bridgecoin (BRC) Sweetbridge Not yet launched Fiat backed To be backed by fiat, crypto, IPs, physical assets and more
Basis Basis Not yet launched Seigniorage shares Prices kept stable by algorithmically adjusting supply
BitUSD (BITUSD) BitShares 2014 Crypto backed Backed by BTS and pegged to USD
Boreal Aurora Not yet launched Crypto backed Backed by ETH and various cryptocurrencies
CarbonUSD Carbon Not yet launched Seigniorage shares Coin supply algorithmically adjusted based on demand. Pegged to USD
Digix Gold Token (DGX) Digix Global 2018 Fiat backed Backed by gold. Each token represents 1g of gold
Dai (DAI) MakerDAO 2017 Crypto backed Backed by ETH and pegged to USD
EURS STASIS Foundation 2018 Fiat backed Backed by and pegged to EUR
eUSD (EUSD) Havven 2018 Crypto backed Backed by ETH and pegged to USD
μFragments Fragments Not yet launched Seigniorage shares Pegged to USD. Supply inflates and deflates in response to demand
Gemini Dollar (GUSD) Gemini 2018 Fiat backed Backed by and pegged to USD
Globcoin (GLX) RCS Not yet launched Fiat backed Pegged to a basket of 15 fiat currencies and gold
HelloGold (GOLDX) HelloGold Sdn Bhd 2017 Fiat backed Backed by gold. Each token represents 1g of gold
kUSD (KUSD) Kowala Not yet launched Seigniorage shares Pegged to USD. Supply expands and contracts depending on market conditions
Monerium Monerium Not yet launched Fiat backed Backed by USD, EUR and other currencies
NOS (Nollar) NOS Not yet launched Fiat backed Backed by EUR, pegged to USD/other fiat currency
nUSD (NUSD) Havven Crypto backed Backed by nomins (Havven’s native currency) and pegged to USD
Paxos Standard (PAX) Paxos Trust Company 2018 Fiat backed Backed by and pegged to USD
Rockz Fiat backed Backed by CHF
Saga (SGA) Saga Foundation Not yet launched Fiat backed Pegged to the International Monetary Fund's special drawing rights (SDR), which is in turn tied to an underlying basket of currencies
StableUSD Stably Blockchain Labs Not yet launched Fiat backed Backed by and pegged to USD
Stronghold USD Stronghold 2018 Fiat backed Backed by and pegged to USD
SwissRealCoin SwissRealCoin 2018 Fiat backed Backed by a portfolio of Swiss commercial real estate
Terra Terraform Labs Scheduled for Q4 2018 Seigniorage shares Price stability ensured by algorithmically expanding and contracting supply. Backed by Luna, Terra’s own asset
Tether (USDT) Tether 2014 Fiat backed Backed by and pegged to USD
TrueUSD (TUSD) TrueCoin LLC 2018 Fiat backed Backed by and pegged to USD
USD Coin (USDC) Circle 2018 Fiat backed Backed by and pegged to USD
USDVault Vault 2018 Fiat backed Backed by gold and pegged to USD
White Standard The White Company 2018 Fiat backed Pegged to USD
X8Currency X8 Currency 2018 Fiat backed Backed by eight fiat currencies and gold

How do stablecoins work?

How do stablecoin creators achieve the price stability they desire? There are three different types of stablecoins, each with its own approach for ensuring minimal price fluctuations.

Taxonomy of stablecoin types
A taxonomy of the main stablecoin types The State of Stablecoins, Blockchain.com

Why are stablecoins important?

While Satoshi Nakamoto’s vision for bitcoin was as a form of electronic cash, the world’s biggest cryptocurrency is rarely used as a medium of exchange on a day-to-day basis. Rather, its volatility and high fees mean that bitcoin is impractical for everyday transactions, and is instead used more as a store of value.

The same can be said for most other digital currencies. Because prices fluctuate significantly from one day to the next, holding and using crypto in the same way you do US dollars (getting paid a salary, paying for groceries, buying a coffee etc.) simply isn’t viable. Think about it why would a business accept bitcoin as payment when 1 BTC might be worth $10,000 today, but tomorrow its value could have dropped to $9,000?

And this is, in theory at least, where stablecoins offer a key advantage. Not only do they offer all the benefits of cryptocurrency, including cryptographic security and the ability to transfer value digitally, but they’re designed to have the low volatility for which fiat currency is famous. The end result is a digital currency that can theoretically be used as a daily medium of exchange in the real world.

Stablecoin uses

What can stablecoins be used for? A price-stable cryptocurrency could potentially have a wide range of purposes, including:

  • Medium of exchange. A successful stablecoin could be used as a medium of exchange for everyday spending in the same way we currently use US dollars.
  • Protection against market volatility. When the crypto market is experiencing a downturn, shifting your money out of traditional digital currencies and into a stablecoin can help hedge against market volatility. This can be particularly useful if you use a crypto exchange that doesn’t support fiat currency.
  • Financial products. Stablecoins could potentially form the basis for a new financial ecosystem, including everything from crypto-backed loans and global remittances to insurance, as they provide the long-term stability required for many financial functions.
  • Prediction markets. If you place a bet on the outcome of an event with a long time frame, using a stablecoin allows you to minimize the impact of market volatility.
  • Global access to a stable currency. In countries where the local currency is plagued by hyperinflation, holding a decentralized stablecoin could allow people to protect their wealth.

Bottom line

There’s little doubt that a working, trusted stablecoin is a key stepping stone on cryptocurrency’s path to mainstream acceptance. However, this goal is still some way off.

There have been numerous examples in recent years of stablecoin projects that have simply failed to stand the test of time. Even Tether, the world’s largest (in terms of market cap) stablecoin and one that’s been around since 2015, has been plagued by accusations that it doesn’t have sufficient US dollar reserves to back up the amount of USDT in circulation.

In The State of Stablecoins, a report from wallet provider Blockchain released in September 2018, the authors summed up the current situation in the stablecoin market by saying:

“While there is a great deal of excitement surrounding stablecoins, the technology is still nascent and it is highly unlikely that the perfect stablecoin design exists at present; further experimentation (and innovation) is expected.”

While some stablecoins have been able to demonstrate short-term stability, only time will tell whether they’ve got the goods to provide long-term reliability. Until that happens, don’t assume that any cryptocurrency will be able to provide the same stability as good old-fashioned fiat currency. And if you’re thinking of putting any of your hard-earned cash into a stablecoin project, make sure you thoroughly research it first.

FAQs

Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Picture: Shutterstock

Disclosure: At the time of writing the author holds ADA, ICX, IOTA, POWR and XLM.

Tim Falk

A writer with a passion for the written word, Tim loves helping people find the right products for them. When he's not chained to a computer, Tim can usually be found exploring the great outdoors.

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