What is a Stablecoin?

By Natalie Hutchison

This could not have come at a better time considering the recent ‘crypto winter’ that largely caused the crash of certain algorithmic stablecoins. Creation and redemption of the stablecoin
Stablecoins are generally created, or “minted,” in exchange for fiat currency that an issuer receives from a user or third party. Many stablecoins claim or expect that the coin can be redeemed at par upon request, in order to maintain a stable value compared to fiat currency. Stablecoins are frequently touted as being backed or supported by various reserve assets.

These assets are meant to be truly stable and anything less is often unacceptable. Examples of non-USD-denominated stable-price currencies include the EURS (offered by Statis), and TrueGBP (offered by Trust Token). Hopefully this guide has given you a point of departure to understand what a stablecoin aims to do, some of its potential and utility, and the factors you may want to consider in using these types of assets yourself. For all these reasons, the stablecoin is an important category of the crypto space, and often held as part of a crypto portfolio. However, extreme selling of Luna crashed its value, compromising its ability to keep UST pegged to the dollar and leading to the collapse of the original Terra blockchain.

Don’t Let Crypto Hype Deter Tough Stablecoins Regs

Stablecoins are a class of cryptoasset pegged to the price of another asset, usually the US dollar, but there are gold-pegged, euro-pegged, even Mexican peso-pegged stablecoins too. The PwC Global CBDC Index is designed to measure central banks’ level of maturity in deploying their own digital currency. The inclusion of the Stablecoin Overview was considered a sensible evolution in the analysis, given the two frameworks co-exist.

A lack of transparency around the assets
may exacerbate those vulnerabilities. A run on the stablecoin could therefore spill over into the traditional financial system by creating stress on these underlying assets, according to the report. The significant crash of TerraUSD that lost more than 90% of their value in a few days and the resulting crypto market turmoil however has put stablecoins in the regulatory spotlights. Regulators worldwide are prompting new calls for regulation highlighting
the risk of certain cryptocurrencies and especially algorithmic stablecoins. As explained above, however, the regulation of stablecoins is just the first stage of the UK government’s intended approach to this growing asset class and the wider industry. It intends to launch a further consultation on its regulatory approach to wider cryptoassets beyond stablecoins used for payments, including those primarily used as a means of investment such as Bitcoin or Ether later in 2022.

Investing in crypto

Rather than buying Bitcoin on a platform and sending it to the DEX in question and paying high transaction fees, it will be much cheaper to turn your fiat currency into stablecoin. Fiat currencies, such as the U.S. dollar or the British pound, don’t see this level of price volatility. So another way https://www.tokenexus.com/what-is-a-stablecoin-and-how-does-it-work/ to think about stablecoins is as a tokenised version of a fiat currency. In theory, a U.S. dollar-based stablecoin is a token that will reside on a blockchain and always trade for one dollar. The algorithm adjusts the coin’s value based on a set of rules, like a central bank adjusts monetary policy.

While compensation arrangements may affect the order, position or placement of product information, it doesn’t influence our assessment of those products. There is a geopolitical dimension as a CBDC comes with its own payment infrastructure. The absence of a digital euro may be feared as something which could weaken the strategic autonomy of the European Union, for instance. https://www.tokenexus.com/ President Biden issued an executive order in March 2022, putting in place a framework which regulators can use to build a Federal Reserve (Fed) CBDC. A stringent regulatory framework would also increase barriers to entry, which is risk-reducing. [1] See the Legal Statement on Crypto assets and Smart Contracts published by the UK Jurisdiction Taskforce in November 2019.

An Introduction To Stablecoins

As stable coins like Tether got popular, there was an advent of another bunch of cryptocurrencies that promised similar notions of stability. There was not necessarily a unit of such said fiat currency parked in a bank account for every token issued as the tokens or currencies. Instead, the value pegged at say a dollar or any other central bank-issued currency, was artificially maintained through an algorithm. While it seems possible in thought, for the algorithm to work in actuality there is a need to devise another cryptocurrency on which this altcoin is pegged.