What Are Stablecoins?
Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. 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 everyday transactions.
Fiat-Collateralized Stablecoins
Fiat-collateralized stablecoins maintain a reserve of a fiat currency (or currencies), such as the U.S. dollar, as collateral, assuring the stablecoin’s value.
Such reserves are maintained by independent custodians and are regularly audited, something that should be considered cautiously. Tether (USDT) and TrueUSD (TUSD) are popular stablecoins backed by U.S. dollar reserves and denominated at parity to the dollar. As of late June 2024, Tether (USDT) was the third-largest cryptocurrency by market capitalization, worth more than $112 billion.
USD Coin (USDC) is a digital currency that is fully backed by U.S. dollar assets. USDC is a tokenized U.S. dollar, with the value of one USDC coin pegged as close to the value of one U.S. dollar as it can get. The value of USDC is designed to remain stable, making USDC a stablecoin.
Commodity-Backed Stablecoins
Somewhat of a sub-category of fiat-collateralized coins, commodity-backed stablecoins are cryptocurrencies that are pegged to the market value of commodities such as gold, silver, or oil.
One of the most popular commodity-backed tokens is Tether Gold (XAUt), a cryptocurrency backed by gold reserves.
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The most popular and largest stablecoin by market capitalization is Tether (USDT).