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what is a stablecoin

The stablecoin can also be used in several decentralized finance protocols. Traders find it useful to hold USDC as a stable asset that avoids market volatility. Tether allows individuals to quickly and efficiently transfer value from one exchange to another without using a volatile cryptocurrency. The fact that a US dollar backs Tether appealed to stock magnates and daily traders. As an alternative to fiat, it provides a place for investors to park their investments when the market is volatile. Tether ($USDT), was launched in 2014 by Tether Limited and has become one of the most popular stablecoins in the market.

Crypto-collateralized and uncollateralized coins rely heavily on their community to function. It’s common to have open governance mechanisms in crypto projects, meaning that users get a say in the development and running of each project. As such, you need to get involved or trust the developers and community to run the project responsibly.

6. USDD Dominance in Blockchains

This uncertainty can make both buyers and sellers hesitant to transact in crypto. For example, in the U.S., one unit of a dollar-pegged stablecoin may be equal to $1. Commodity Futures Trading Commission fined Tether $41 million for making untrue statements that its stablecoin was backed 100 percent by actual currency.

  • Second, because cryptocurrencies are usually more volatile than other assets, these organizations typically hold more in their reserves than the amount in circulation.
  • If you’re looking to add some riskier assets to your portfolio, individual stocks can also fill that role.
  • Each fiat-backed stablecoin is tied to a specific fiat currency in a one-to-one ratio.
  • The pioneering stablecoin was the brainchild of two prominent figures in the blockchain industry, Charles Hoskinson and Dan Larimer.
  • To mint 100 DAI pegged to USD, you will need to provide $150 of crypto as 1.5x collateral.
  • Gold has long been seen as a hedge against stock market volatility and inflation, making it an attractive addition to portfolios in fluctuating markets.

Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for common transactions. This arrangement would be similar to H-shares, whereby stocks of essential mainland-based companies are traded in Hong Kong. The result would essentially be an operational offshore digital renminbi – a currency that benefits from the added market confidence brought about by HKMA oversight.


Ethereum’s dominance underscores its significance in the ecosystem for USDC- based transactions and liquidity provision. Tether dominates the stablecoin market with a 71.47% share, far ahead of its closest competitor, USDC, at 20.57%. Dai, First Digital USD, and TrueUSD follow with smaller percentages. Tether’s dominance reflects its widespread adoption and trust within the stablecoin ecosystem. Tether dominates the stablecoin market with a market cap of $97.91 billion, followed by USDC at $28.18 billion.

As the crypto market is highly volatile, crypto-backed stablecoins usually over-collateralize the reserves as a measure against price swings. Dai (DAI) is the fourth largest stablecoin by market cap and is pegged to the U.S. dollar on a one-to-one basis. Unlike the three stablecoins mentioned above, DAI is not backed by U.S. dollars but by a combination of various crypto assets. These coins are kept stable through a computer program running a preset formula; hence, its name.

Why Are Stablecoins Important to Cryptocurrency?

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

what is a stablecoin

This leads to more liquidity, which makes the crypto market more efficient. Increased efficiency also brings more accurate asset pricing, resulting in fairer asset prices,tighter bids and ask spreads. It’s important to note the risk of depegging may be higher for algorithmic stablecoins than for other types that have sufficient and transparent reserves. During the same time, the broader crypto market was experiencing a sell-off. Both these factors occurring simultaneously sent the stablecoin spiraling, making it essentially worthless overnight. Similar to the types of stablecoins listed above, crypto-backed stablecoins are pegged to other cryptocurrencies.

Other cryptocurrencies may fluctuate in value relative to, say, the U.S. dollar. In contrast, the price of a stablecoin should not change relative to the currency to which it’s pegged. A stablecoin worth $1 aims to maintain the price of $1; nothing more, nothing less.

what is a stablecoin

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