Stablecoins are cryptocurrencies that represent traditional currencies but exist digitally on a blockchain. The value of a stablecoin is tied directly to its underlying asset, like the US dollar. Other stablecoins also exist that represent assets like gold or another type of commodity.
Types of Stablecoins
The most common type of stablecoins are US dollar stablecoins. One unit of a US stablecoin represents one unit of a real US dollar.
Examples of stablecoins include USDT, USDC, BUSD, and DAI.
USDT: USDT or tether is the most commonly used stablecoin. Although it is the most popular, tether has been going through the controversy of it being actually backed 1 to 1 of its underlying asset, the US dollar.
USDC: USDC is a stablecoin operated by Circle, a fintech firm located in the United States. USDC focuses on transparency with US dollar reserves audited monthly by a top 5 accounting firm, Grant Thornton LLP.
BUSD: BUSD, the third largest stable coin by market cap was created by Binance, one of the largest cryptocurrency exchanges in the space.
DAI: DAI is a decentralized stablecoin that isn’t backed by US dollars. It is instead backed by Etheruem as collateral through smart contracts with mechanisms to keep a 1:1 peg to USD. Additional information about how DAI works is available in their whitepaper.
Why Should You Use a Stablecoin?
Stablecoins provide a fast and low-cost way to move dollars globally in minutes. However, transacting in stablecoins will require both parties to have a digital wallet.
Another reason to hold a stablecoin is to avoid the volatile prices of “non-stable” cryptocurrencies like Bitcoin. Stablecoins can be traded into and out of different cryptocurrencies in seconds while staying within the crypto space. It is not necessary to convert and move funds back and forth from a bank account.
How do I Use Stablecoins?
Stablecoins can be held in a digital wallet or on an exchange. Because stablecoins are available on multiple types of blockchains, always check to make sure they are compatible between the wallet addresses you send them to.
USDT, for example, can be traded on the Ethereum (ERC20) or the Binance Smart Chain (BEP20) blockchain networks.