🔆Stablecoins, stable cryptocurrencies.✨✨✨🔆
USD Coin, Tether, or DAI are examples of stablecoins. These are a type of token designed to maintain a constant financial value and thus prevent the volatility of other virtual currencies like Bitcoin or Ether.
One of the main characteristics of cryptocurrencies is their high volatility; this volatility can be an obstacle for those looking to invest or enter the world of cryptocurrencies. However, there is a category designed to mitigate this uncertainty: stablecoins.
Stablecoins are tokens whose value is tied to that of a real asset or controlled by an algorithm, making their price more stable than that of other cryptocurrencies. The main objective of creating a stablecoin is to provide investors with a safe haven during times of volatility.
Furthermore, stablecoins are one of the cryptocurrencies referred to in the Markets in Crypto-Assets Regulation (better known as MiCa), which has entered into force in phased implementation for all member states since June 2024 and will be completed in July 2026. The regulation requires these digital currencies to meet strict transparency and solvency requirements. Specifically, all issuers must be authorized and have a solid reserve of assets to support their parity.
✴️🔸Types of stablecoins:
Stablecoins can be of different types depending on the mechanism they are linked to to maintain their stability, according to IBS Business School. These are the so-called backed (or "collateralized") stablecoins, which are linked to an external value:
✏️🔸Stablecoins backed by fiat currency. They are pegged to traditional currencies, such as the dollar, pound, or euro, and generally maintain a 1-to-1 ratio with the reference currency. For example, Tether (USDT) and USD Coin (USDC) are backed by US dollar reserves, meaning that for every unit of these stablecoins, there is one dollar in reserve. This backing ensures that the value of the stablecoin remains stable and equivalent to the fiat currency to which it is pegged.
✏️🔸Commodity-backed stablecoins. These coins are pegged to physical assets, such as gold, silver, or oil. For example, Tether Gold (XAUT) and PAX Gold (PAXG) are backed by gold reserves, meaning each unit of these stablecoins represents a specific amount of gold in storage, providing reliable protection in situations where a currency's value declines or during periods of inflation.
✏️🔸Crypto-backed stablecoins. These coins are pegged to other cryptocurrencies, using a combination of digital assets to secure their value. For example, Dai (DAI) is backed by a mix of cryptocurrencies such as ether (ETH). This can cause concern among investors due to the high volatility of the cryptocurrencies used as backing. However, to mitigate these risks, many of these stablecoins maintain a 1:2 ratio. That is, for each stablecoin unit issued, twice the value in cryptocurrency is reserved as backing.
◽ However, there is also another type of 'stablecoins' that are not backed by tangible assets, but rather use algorithms to maintain a constant price.
✏️🔸Algorithm-backed stablecoins. These cryptocurrencies rely on algorithms and smart contracts to maintain their stability. Therefore, their value is automatically regulated by adjusting the amount of coins available on the market based on demand. For example, if more people want to buy the stablecoin, the system issues more units to meet that demand and keep the value stable. Examples of this are coins like Ampleforth (AMPL) or Frax (FRAX), which combine algorithmic backing with a reserve of assets.
In all cases, whether they are coins backed by a real asset or controlled by algorithms, their main objective is the same: to protect investors in times of high volatility.
✴️🔸What are stablecoins used for?▫️✨✨✨
Stablecoins offer the advantages of cryptocurrencies, such as instant transfers, without the drawbacks of volatility. This allows investors to use these cryptocurrencies with the peace of mind that their value will remain stable, offering several advantages and facilitating their use in various financial applications.
This makes one of the main uses of stablecoins international transfers, as Forbes points out. These transactions require currency conversion through multiple banks and intermediaries, which generates fees and can take several business days to complete. With stablecoins, however, these transfers are instantaneous and with much lower or even zero fees.
In addition to fast and cheap transactions, stablecoins have other important uses. They are used in trading to facilitate the exchange between different cryptocurrencies, in decentralized finance (DeFi) to make loans and generate returns, and, although less common, for payments in some e-commerce stores.
Furthermore, as Harvard Business Review explains, the characteristics of these cryptocurrencies could be key to boosting small and medium-sized businesses, as they benefit from a more competitive payment infrastructure that allows for new ways to reach consumers. Thus, immediacy and efficiency are some of the advantages of stablecoins, currencies that have been on the rise in recent years and that will now also be regulated in Europe to ensure their security.