Stablecoins have been gaining traction because of their unique ben to the crypto market. These assets have attracted mainstream interest, including from investors seeking stability for their investments.
Governments have also been looking at this asset class more closely. For example, Iran and Russia are reportedly collaborating on a gold-backed stablecoin that would offer a payment alternative instead of the Dollar, Ruble, or Iranian Rial in the Persian region.
But what exactly are stablecoins? Check the 5 things to know about these assets.
1. What are stablecoins?
Stablecoins are a type of crypto asset with their value pegged to another currency or asset. In this sense, they provide a more stable alternative to the high volatility of popular crypto assets like Bitcoin, making them more suitable for everyday transactions. They also offer the benefits of security and decentralization of crypto assets coupled with the stability of fiat currencies.
Stablecoins maintain their stability by being pegged to specific assets. For example, US Dollar is the asset that backs USDC and USDT, while gold backs PAXG. This means that the value of the stablecoin closely follows one of the assets it is pegged to. If the value of that asset rises, the value of the stablecoin will increase, and vice versa.
2. Types of stablecoins
Based on the method used to maintain a stable value, stablecoins can be classified into three categories.
- Fiat-collateralized stablecoins: These stablecoins are backed by a reserve of fiat currency, such as the US dollar, held in a bank account.
- Crypto-collateralized stablecoins: These stablecoins are backed by a reserve of another cryptocurrency, such as Bitcoin. They use smart contracts to ensure the value remains stable.
- Non-collateralized stablecoins: These stablecoins are not backed by any physical assets but instead rely on complex algorithms and smart contracts to maintain their value. Examples include Seigniorage Shares and Algorithmic stablecoins.
It's important to note that not all stablecoins have the same characteristics Some are more decentralized than others, some have more transparent mechanisms for maintaining their value, and others have different levels of regulatory compliance.
3. Stablecoins Market Cap
Stablecoin usage increased widely in the last few months. According to coinmarketcap data, the market capitalization of stablecoins is over $138 billion.
As of February 1st, the top three stablecoins by market cap are:
- Tether USDT - 3rd largest crypto asset ($67 billion)
- USD Coin USDC - 5th largest crypto asset ($42 billion)
- Binance USD BUSD - 7th largest crypto asset ($16 billion)
4. Top 3 stablecoins
Tether (USDT) is a stablecoin issued by Tether Limited, which is affiliated with Bitfinex. According to the company, each token is backed by one United States dollar. USDT is the world's most popular stablecoin, and it widely serves as a replacement for the dollar on major cryptocurrency exchanges.
Read more: 5 things to know about USDT
USD Coin (USDC) is a stablecoin created by Circle and was first launched on the Ethereum blockchain. USDC is less volatile than other digital assets, making it suitable for payments and remittances. This is why it's favored by traders as they can move profits to lower-volatility assets without converting to fiat.
Read more: 5 things to know about USDC
Binance USD (BUSD) is a stablecoin pegged 1:1 to the US dollar, created by Binance and Paxos. It can be used for commerce, loans, and payments and is accessible via Binance's exchange and fiat gateway services. BUSD can also be minted and held on Binance Coin (BNB) and Ethereum blockchains. It offers accessibility, flexibility, and speed.
5. Stablecoins and regulations
Today, there is no clear legal classification for stablecoins in most jurisdictions. However, following the collapse of TerraUSD (UST) in 2022, regulators have been keen on establishing a certain scope of regulations for stablecoins by applying existing laws or creating new reforms.
Read more about:
Stablecoins: Understanding ML/TF Risks and Regulatory Developments
UK’s consultation regarding proposed safeguards against stablecoin failure risks
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