To understand the significance of commodity-backed stablecoins, we first need to take a look at how stablecoins work in the cryptocurrency market. Aren’t backed by any asset — perhaps making them the stablecoin that is hardest to understand. These stablecoins use a computer algorithm to keep the coin’s value from fluctuating too much. If the price of an algorithmic stablecoin is pegged to $1 USD, but the stablecoin rises higher, the algorithm would automatically release more tokens into the supply to bring the price down. If it falls below $1, it would cut the supply to bring the price back up. How many tokens you own will change, but they will still reflect your share.

A stablecoin is a type of cryptocurrency whose value is pegged to an external, generally stable, asset class such as a fiat currency or gold. The interest in stablecoins is that they are built to withstand volatility in a way that other cryptocurrencies aren’t, but still offer mobility and accessibility. A more stable cryptocurrency is still decentralized, meaning it isn’t beholden to the rules and regulations of a centralized system.

Are stablecoins actually stable?

In this tutorial, you will come across all the essential questions related to Stablecoins. Griffin and Shams’ research attributed the creation of unbacked USDT to the rise in Bitcoin’s price in 2017. Following that, research indicated little to no evidence that Tether USD minting events influenced Bitcoin values unless they were publicized to the public by Whale Alert. Built In’s expert contributor network publishes thoughtful, solutions-oriented stories written by innovative tech professionals. It is the tech industry’s definitive destination for sharing compelling, first-person accounts of problem-solving on the road to innovation.

What is an example of a stablecoin

Interestingly, Binance USD offers some of the critical advantages that you can find with Paxos Standard also. Seigniorage is generally under the governance of an algorithm or a process in comparison to a currency or asset. In this case, smart contracts on decentralized platforms can serve as independent supporters for the Seigniorage-backed stablecoins.

Crypto lingo

Long before Bitcoin, there were several projects that attempted to create digital money through cryptography. “While investing their dollar reserves can increase profits, it also increases the risk of a run, and not having sufficient liquid reserves to meet redemptions in response to an investor panic,” Natraj says. TerraUSD now trades under TerraClassicUSD since the Terra blockchain was officially halted and de-pegged from the U.S. dollar on May 9. Although not to the same extent as TerraUSD, investors worried about the reliability of reserves, and whether Tether was fully collateralized. Tether still maintains that it has sufficient reserves to back the $66.9 billion of Tether tokens in circulation. Additionally, the company has yet to default on any redemption request.

She has written pieces for IMNOTABARISTA, Tourmeric and Vocal in the past, including one of her favourite pieces on remaining positive and strong through trying times, which can be found at the link above. Outside of her working life, Katie loves growing plants, cooking, and practicing yoga. One of the few working examples using this model to date is known as UST created by blockchain project Terra.

If the price increases or decreases, the Dai stablecoins are created or burned to stabilize the price at one dollar. Stablecoins achieve stability by pegging themselves to a less volatile asset such as gold or fiat currency. Stablecoins are an attempt to create a cryptocurrency token with a stable price.

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The company has said that it will continue decreasing its reliance on this funding. Here’s how stablecoins work, what risks they present and how to check if a stablecoin is safe. Centralized StableCoins have stable prices and are less vulnerable to hacks because no actual collateral is held on the blockchain. However they require custodians who store the collateral, and auditors to ensure that collateral backups physically exist. Crypto staking, in which cryptocurrency owners can earn rewards by essentially lending out their holdings to help execute other transactions.

What is an example of a stablecoin

Stablecoin refers to a range of cryptocurrencies that derive their market value from some external reference. There is no exact number of existing cryptocurrencies because the code of the cryptocurrency is an open source. This means anyone can create their own version of cryptocurrency by just using the code. Stablecoins must be audited through 3rd parties that may create conflicts of interest to a decentralized, trustless or pseudonymous experience.

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  • For example, $1,000 of ether might be maintained as reserves for issuing $500 in crypto-backed Stablecoins, allowing for up to 50% of reserve currency swings .
  • But due to the underlying collateral being in cryptocurrency, it is prone to more volatility.
  • Using Hedera’s distributed public ledger, cross-border trade is streamlined and gives full transparency to all parties.
  • It does not have the backing of the US dollar or any other fiat currencies.

This stablecoin can be borrowed from the MakerDAO lending platform as long as the borrower deposits some crypto collateral. At the moment, users can use Ethereum , Basic Attention Token , Compound Token , and USD Coin . Anyone wanting to borrow DAI must deposit more collateral than they’re taking out. And, if their collateral loses too much value while it’s deposited, they may have to liquidate it and return the borrowed DAI. To give you a taste of the experimentation happening in stablecoin land, let’s run through some of the most popular stablecoins. Some Stablecoins may be available on centralized exchanges like Coinbase; however, such exchanges may only display fiat-backed versions.