What Makes Stablecoins — Stable?#

Think of stablecoins as a sort of anchor.

Useful given the extremely volatile nature of the cryptocurrency market.

Stablecoins are digital reserve assets in which the value remains virtually unchanged no matter how big the waves of crypto volatility move the market.

It is a form of cryptocurrency built to resist change, unlike volatile cryptocurrencies such as Ethereum and Bitcoin.

Designed to reduce volatility, stablecoins are also faster and easier to transfer, making them a close blockchain equivalent to everyday money, cash.

Stablecoins do share a decentralized characteristic of cryptocurrency in that they are not minted by any centralized exchange or entity. They are an independent cryptocurrency and they keep financial data private.

Common Use Cases of Stablecoins#

Volatility Reduction#

Because of their stable nature, stablecoins provide a safe haven for crypto investors to “park” their crypto investments in an asset where there is virtually no risk of price volatility.

Trade and Store with Ease#

Stablecoins are “mobile” assets. They’re easy to transfer and store in a hot or cold wallet that doesn’t have the same constraints as a bank account. Investors and owners can send stablecoin anywhere around the world without having the need to convert it into local currency.

Cheaper Fund Transfers#

Transfer fees for sending stablecoin are significantly less than for fiat currency. Because of its ability to keep its price anchored, cryptocurrency owners and investors may prefer using stablecoins for fund transfers and trades over traditional fiat currency exchange.

Lending#

Another popular use of stablecoins is lending. It’s an interesting opportunity for investors because it can offer two-digit interest rates, but without incurring the price volatility associated with traditional cryptocurrencies.

DeFi Insurance#

Stablecoins are likely to have a key role in DeFi insurance. They are used in smart contracts that guarantee liquidity and provide cover when a policyholder gets exposed to cryptocurrency risks and security issues.

Tether, BUSD, DAI and Other Popular Stablecoins#

Tether#

Tether is a popular stablecoin because of its ability to stay as valuable as the US dollar. It was designed to follow very closely the value of the USD. Bitfinex-owned Tether Limited claims they reserve 1 USD with every Tether they have in circulation.

Binance USD#

BUSD is another stablecoin that is also pegged to the USD. One of the stablecoin’s founders, Paxos, holds an amount of US dollars equal to the total supply of Binance USD.

DAI#

Similar to USDT or USDC, Dai is a stablecoin whose price is pegged to the USD. It’s based on Ethereum and backed up by a variety of other cryptocurrencies. The maker protocol and the makerDAO decentralized autonomous organization oversee its issuance and development.

USD Coin#

The USDC coin is backed by the dollar and runs on a variety of blockchains, including Algorand, Ethereum, and Solana, to mention a few. It’s also a cryptocurrency-backed stablecoin. Its fund reserves are held at FDIC-insured institutions in the United States.

How to Choose and Buy Stablecoins#

1) Choose Your Stablecoin#

Begin by taking a look at the stablecoin of your choice.

It is important to research the collateral that backs your preferred stablecoin. Understand how the systems that run these stablecoins maintain their promised stability. Do your own research and ask questions that answer what happens if the stablecoin’s price mechanism, collateral system, or security goes wrong.

Are their systems secure? Are you confident they have the collateral to keep their stablecoin “stable”? Can anything wrong happen to your funds if stored in this stablecoin?

Purchase stablecoins only if you feel secure and confident it can stay stable over time and under unfavorable circumstances.

The majority of these stablecoins are backed by the US dollar but there are also stablecoins backed by gold or even other cryptocurrencies.

2) Sign Up with Your Chosen Crypto Exchange#

Choose an exchange that sells your preferred stablecoin or whichever stablecoin it offers, if that’s okay with you.

Register with either a centralized or decentralized cryptocurrency exchange of your choice. The specific registration procedure varies slightly on each exchange, although it is usually simple.

There is an identity verification process that takes place either during or after you create an account. This is necessary for exchanges to ensure that accounts aren’t being used for illicit purposes and to meet tax reporting requirements.

3) Deposit Money in Your Chosen Exchange#

Add funds to your exchange account to purchase cryptocurrencies and stablecoins.

A transfer from your bank account is the most suggested method. Use the account number and routing number to add your bank account as a funding source. Then transfer the desired amount. All of this is possible thanks to the crypto exchange.

Keep in mind that the transfer may take several business days to complete. Because crypto exchanges can trigger banks’ fraud detection, you may additionally need to get your bank to authorise the transaction.

Many exchanges allow you to buy cryptocurrency with debit cards, credit cards, or PayPal. These methods, however, nearly invariably come with additional costs.

4) Buy Your Preferred Stablecoins#

Select the option to purchase cryptocurrency.

Choose the stablecoin you want to use and the amount you want to spend. A transaction preview will display the fees, total cost, and amount of stablecoin you will receive. Confirm the purchase when you’re ready.

That’s all there is to it. Buying stablecoins normally takes only a few minutes, so you should have yours in no time. After that, you’re free to do whatever you want with your stablecoins, including lending them, transferring them to others, and storing them in a crypto wallet.

Can the Future of Money Be Stablecoin?#

Stablecoins offer huge benefits over fiats such as lower costs, safety, and real-time use.

In comparison to what consumers and businesses are used to, they also offer more competitive payment options.

They might make it easier for governments to administer conditional cash transfer programs and make it cheaper for businesses to receive payments.

They have the potential to bring unbanked or underbanked people into the financial system.

In an extremely volatile market, having a digital asset that has no more price volatility than the USD is a valuable tool for investors to use in the crypto environment.