A stablecoin is a cryptocurrency with a steady value backed by a reserve asset like the U.S. dollar.
Most stablecoins are created through the use of smart contracts and ERC-20 tokens on the Ethereum blockchain.
Stablecoins are popular among crypto users for their ability to safely store value, make fast and inexpensive transfers, and their ability to be used in Decentralized Finance.
Cryptocurrencies have revolutionized how we view money, but one of their biggest downfalls has been their price volatility. Bitcoin, ether, litecoin, and other cryptocurrencies are prone to dramatic price fluctuations, with bitcoin's price fluctuating sometimes as much as $10,000 in one day.
Understandably, these dramatic price swings are the reason that many have yet to participate in cryptomarkets. Stablecoins are the crypto world's solution for combating price volatility. They marry the convenience and privacy of using cryptocurrency with the stability of government-issued currencies.
What are stablecoins, exactly? How do they work? Here's what you need to know.
What is a stablecoin?
A stablecoin is a type of cryptocurrency backed by a reserve asset like the U.S. dollar or gold. Unlike traditional cryptocurrencies, which face extreme price fluctuations, a stablecoin's value remains steady because of its backing.
Essentially, stablecoins use blockchain technology to tokenize the reserve asset they are backed by. Typically, stablecoins are linked to stable assets like fiat currencies — government-issued currencies like the U.S. dollar, euro, or yuan. Other stablecoins are backed by precious metals like gold and silver, and some are even linked to other cryptocurrencies such as ether.
The most common reserve asset to back a stablecoin is the U.S. dollar. The value of stablecoins backed by USD is designed to maintain a 1:1 ratio so that one coin is equal to the value of $1.
How do stablecoins work?
Stablecoins have become popular because they offer both the privacy and speedy transaction times associated with cryptocurrency and, ostensibly, the price stability of government-issued currencies. This price stability is accomplished through the collateralization, or backing, of the reserve asset.
Different stablecoins work in different ways, but USD Coin (USDC), a stablecoin that tokenizes the USD and is one of the most popular by market capitalization, works through a process facilitated by smart contracts. Someone looking to mint new USDCs will send their U.S. dollars to the coin issuer's bank account. The issuer then creates the equivalent amount of USDC using a smart contract and ERC-20 token on the Ethereum blockchain. The newly minted USDC are then sent to the user, and the U.S. dollars sent in are held in a reserve.
As of March 2023, nearly 60% of all stablecoins issued run on the Ethereum network.
What is the point of stablecoins?
There are many different reasons why you may be interested in putting money into stablecoins. Below, find three of the most common reasons stablecoins are so popular.
Safe store of value
Stablecoins are a popular choice among individuals that are unbanked or underbanked. It can be tough to connect with the digital economy or safely store your money without a bank account. Cash-dependent people can use bitcoin ATMs to convert their money into a stablecoin as a means for safely storing funds on the blockchain or making payments online.
Because stablecoins are a cryptocurrency designed to keep their value, they are great options for making everyday payments or sending money to loved ones. They can be particularly advantageous for migrant workers who want to enjoy cryptocurrencies' fast, cost-effective money transfers while maintaining the stable and robust value of the U.S. dollar.
Stablecoins are often used in crypto loans issued through decentralized finance (DeFi) protocols. Stablecoins are a prevalent choice for those taking advantage of crypto loans because of their enduring value and ability to convert into fiat currency easily.
Where can you buy stablecoins?
To purchase stablecoins, you will first need a crypto wallet. As most stablecoins are supported by the Ethereum blockchain, they will be supported by most crypto wallets.