What are Stablecoins?
Stablecoins are a type of cryptocurrency that aim to maintain a stable value by being pegged, or tied, to another asset, such as a fiat currency (e.g. US dollar), a commodity (e.g. gold), or another cryptocurrency (e.g. Bitcoin). Stablecoins try to offer the benefits of both cryptocurrencies and traditional currencies, such as fast transactions, low fees, transparency, security, and price stability.
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.S. dollar or to the price of a commodity such as gold.
- Stablecoins pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that are supposed to control supply.
- Stablecoins continue to come under scrutiny by regulators, given the rapid growth of the $128 billion market and its potential to affect the broader financial system.
- Stablecoins can be used on many popular blockchains, but most activity these days happens on Ethereum or the Tron Blockchain
Why are Stablecoins important?
Stablecoins are important because they can enable more widespread adoption of cryptocurrencies and decentralized finance applications (dApps) that run on blockchain networks. By reducing the volatility and risk associated with holding and using cryptocurrencies, stablecoins can make them more accessible and attractive to a wider range of users, including individuals, businesses, and institutions.
Some of the use cases for stablecoins include:
- Remittances: Sending money across borders can be expensive and slow with traditional payment systems. Stablecoins can offer a cheaper and faster alternative that preserves the value of the transferred funds.
- Trading: Cryptocurrency traders can use stablecoins as a safe haven to store their profits or hedge against market fluctuations without having to convert their crypto assets into fiat currencies and incur fees or delays.
- Lending: Borrowers and lenders can use stablecoins to access decentralized lending platforms (DeFi) that offer attractive interest rates and flexible terms without intermediaries or credit checks.
- Payments: Merchants and consumers can use stablecoins to pay for goods and services online or offline without worrying about price volatility or currency conversion costs.
What kind of Stablecoins exist?
There are three main types of stablecoins, based on the mechanism used to stabilize their value:
- Fiat-backed: These stablecoins are backed by a reserve of fiat currency (such as the US dollar) that is held by a third-party custodian (such as a bank). The issuer of the stablecoin promises to redeem each stablecoin for its equivalent value in fiat currency upon request. The value of these stablecoins is supposed to track the value of the pegged currency, but it depends on the trust in the custodian and the issuer. Examples of fiat-backed stablecoins include Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).
- Commodity-backed: These stablecoins are backed by a reserve of physical commodities (such as gold or silver) that are stored in secure vaults. The issuer of the stablecoin promises to redeem each stablecoin for its equivalent value in the commodity upon request. The value of these stablecoins is supposed to track the value of the pegged commodity, but it depends on the trust in the custodian and the issuer, as well as the market demand and supply for the commodity. Examples of commodity-backed stablecoins include Paxos Gold (PAXG) and Tether Gold (XAUT).
- Crypto-backed: These stablecoins are backed by a reserve of other cryptocurrencies (such as Bitcoin or Ether) that are locked in smart contracts on a blockchain network. The issuer of the stablecoin uses overcollateralization (i.e., providing more crypto assets than the value of the issued stablecoins) and liquidation mechanisms (i.e., selling some of the crypto assets to maintain the peg) to ensure that each stablecoin is always fully backed by crypto assets. The value of these stablecoins is supposed to track the value of the pegged currency or commodity, but it depends on the trust in the smart contract code and the stability of the underlying crypto assets. Examples of crypto-backed stablecoins include Dai (DAI), sUSD (SUSD), and BitUSD (BITUSD).
What can you do with Stablecoins?
Stablecoins can be used for various purposes, such as:
- Buying and selling other cryptocurrencies on exchanges or peer-to-peer platforms.
- Storing your wealth in a digital form that is resistant to inflation, censorship, and seizure.
- Sending and receiving money across borders with low fees and fast settlement times.
- Accessing decentralized financial services (DeFi) that offer lending, borrowing, trading, investing, saving, and more.
- Paying for goods and services online or offline with merchants that accept stablecoins as a payment option.
What are some popular Stablecoins?
Some of the most popular and widely used stablecoins are:
- Tether (USDT): The oldest and largest stablecoin by market capitalization, Tether claims to be backed by US dollars at a 1:1 ratio, but it has faced controversy and scrutiny over its reserves and transparency. Tether is available on several blockchain networks, including Bitcoin, Ethereum, Tron, and Binance Smart Chain.
- USD Coin (USDC): A regulated and audited stablecoin that is backed by US dollars at a 1:1 ratio, USD Coin is issued by a consortium of companies led by Circle and Coinbase. USD Coin is available on several blockchain networks, including Ethereum, Algorand, Stellar, and Solana.
- Dai (DAI): A decentralized and algorithmic stablecoin that is backed by a basket of crypto assets (such as Ether and USDC) that are locked in smart contracts on the Ethereum network. Dai maintains its peg to the US dollar through a system of incentives and penalties that adjust the supply and demand of Dai and its collateral.
- Binance USD (BUSD): A regulated and audited stablecoin that is backed by US dollars at a 1:1 ratio, Binance USD is issued by the Binance exchange in partnership with Paxos. Binance USD is available on several blockchain networks, including Ethereum, BNB Chain, and Binance Smart Chain.
Where can I buy Stablecoins?
One of the easiest and fastest ways to buy stablecoins is through Gem Wallet, a mobile crypto wallet that lets you buy DeFi tokens with a credit or debit card. Here are the steps to follow:
- Download and install Gem Wallet on your device.
- Tap on the buy button, select the Stablecoin and you want to buy.
- Choose your preferred payment method (credit or debit card) and complete the purchase.
- Receive your Stablecoin of choice in your Gem Wallet within minutes.
You can buy a minimum of $50 USD, and up to $20,000 USD, worth of any Stablecoin with a credit or debit card through Gem Wallet.
How do I get a Stablecoin Wallet?
To store and manage your stablecoins, you need a stablecoin wallet that supports the blockchain network and the type of stablecoin you want to use. Gem Wallet is a versatile and user-friendly stablecoin wallet that supports multiple blockchain networks and stablecoins, such as USDT, USDC, DAI, BUSD, and more.
To get a stablecoin wallet with Gem Wallet, you just need to:
- Download Gem Wallet from the App Store or Google Play Store, or from our Download page as an APK.
- Create an account and set up your security features (PIN code, fingerprint, face ID).
- Choose the Stablecoin you want to use from the list of supported tokens.
- Start sending, receiving, and managing your stablecoins with Gem Wallet.
