Stablecoin Definition: What Are They and How Do They Work?

And by putting your coins at stake, you have the chance to earn rewards. Some types of stablecoins can also be used for crypto staking, in which cryptocurrency owners can earn rewards what is a stablecoin by essentially lending out their holdings to help execute other transactions. Staking carries risks, however, so make sure you read up on the specifics for the coin you intend to use.

USD Coin (USDC) is a prime example of a collateralised stablecoin. The graph below shows USDC’s collateral reserves as of August 2022—at $54 billion, the coin’s reserves are slightly greater than its liabilities of $US53.8 billion. Creating a coin that tracks another asset’s price or value requires a pegging mechanism. There are multiple ways to do this, and most rely on another asset acting as collateral. Some methods have proved more successful than others, but there is still no such thing as a guaranteed peg. However, there are still many challenges before a future where cryptocurrencies are mainstream materialises – the most important of which being regulation.

An Introduction To Stablecoins

However, data shows that only 2.8% (756 million) of USDC are currently locked in DeFi applications. While outstanding loans would not appear locked in these contracts, data shows 1.3 billion USDC has been lent out from these applications, indicating that https://www.tokenexus.com/ outstanding loans do not meaningfully change the analysis. Even in March 2022, before interest rates started rising, only $8 billion in stablecoins were locked in DeFi protocols. At the time, this represented just 5% of the total stablecoin supply.

And even then, stablecoin owners should pay careful attention to exactly what is backing their coin. The stablecoin Tether has come under fire for its disclosures on reserves. And those who think the cryptocurrency is fully reserved by actual dollars should be careful. Algorithmic stablecoin issuers can’t fall back on such advantages in a crisis. In some ways that’s not so different from central banks, which also don’t rely on a reserve asset to keep the value of the currency they issue stable.

What is a Stablecoin?

Instead of fiat currencies, however, they’re pegged to commodities—typically gold. For example, if Company B has $10 billion of their stablecoin in circulation, they will need to hold $10 billion or more in gold in their reserves for the stablecoin to be usable. Stablecoins aim to solve this uncertainty, attempting to combine the stability of cash with the benefits of crypto technology. On one hand, they operate on blockchains, which supporters believe provide greater security, transparency, cost efficiency, and speed. On the other, they try to reflect the value of real-world assets like the US dollar.

Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. Counterparty risk is the probability that the other party in the asset may not fulfill part of the deal and default on the contractual obligation.

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