What is a Stable Coin?
Exodus allows you to exchange to and from Tether (USDT), TrueUSD (TUSD), Gemini Dollar (GUSD), USD Coin (USDC), Paxos (PAX), and DAI (DAI).
Learn about stablecoins in this quick and easy-to-understand stablecoin guide.
In this Article:
What are Stablecoins?
Cryptocurrencies like Bitcoin and Ethereum are known for their volatility.
To counter the wild price swings of various blockchain assets, cryptocurrencies or tokens known as “stablecoins” have been developed.
Stablecoins are cryptocurrencies or tokens that are designed to be stable in value and have the same price as traditionally stable currencies like the US dollar or assets like gold.
For example, if we had a Stablecoin called “Stabledollar”, one Stabledollar would be worth $1.
Types of Stablecoins
Fiat-collateralized stablecoins are backed by fiat currencies, or currencies issued by governments like the dollar and euro.
A popular example is Tether, one of the earliest stablecoins and the most popular stablecoin today.
To ensure the stability of Tether and its $1 price, the Tether organization keeps one dollar for each Tether in use.
However, some doubt that Tether really has sufficient reserves of US dollars, which has led to other fiat-collateralized stablecoins being released like USD Coin, Paxos Standard Token, and Gemini Dollar, all of which are regulated and required by law to hold full reserves of US dollars.
Crypto-collateralized stablecoins are backed by cryptocurrency.
The first stablecoin, BitUSD, is an example of a crypto-backed stablecoin (each BitUSD is backed by the dollar equivalent or more of BTS, or the cryptocurrency BitShares).
The most popular crypto-backed stablecoin today is Dai, which is different from projects like BitUSD since users don’t have to trust that a third party is holding sufficient reserves.
Instead, Dai is only created when users send Ether to an Ethereum-based smart contract.
Other types of stablecoins are backed by commodities like gold or backed by nothing, such as most modern day government-issued currencies (like those currencies, non-collateralized stablecoins are created and bought to manage prices).
Why Stablecoins? Stablecoin Use Cases
Protection against Volatility
Stablecoins can protect against price swings.
This feature is useful for various reasons like the following:
- Cryptocurrency traders might want to protect their gains by switching to a stablecoin in case prices go down.
- Business owners, such as cafe owners, might not want to sell a cup of coffee for $2 in digital currency to have that $2 turn into $1 an hour later.
- Protecting your wealth from losing value as your local currency decreases in price.
- And much more!
Sending international payments can be costly and slow.
For those, such as migrant workers, who have to send money internationally to friends and family, stablecoins beat current methods as they are faster and usually have lower fees.
These are just some of the ways individuals and organizations choose to use stablecoins, but any situation where users could benefit from cryptocurrency (fast, low/no fee, irreversible, etc.) while still maintaining the price stability of currencies and assets like the US dollar would be great for stablecoin usage.
Stablecoins do have risks however:
- They don’t always maintain their price peg
- The currency or asset they’re pegged to can itself decrease in value.
- Stablecoins carry counterparty risk since holders have to trust someone else to fulfill a promise like keeping sufficient USD reserves
- Regulatory concerns can lead to projects shutting down.
Exodus offers users an easy, private, and secure way to store, manage, as well as both buy and sell stablecoins like USD Coin (USDC), Paxos (PAX), Gemini (GUSD), TrueUSD (TUSD), Tether (USDT) and DAI (DAI) using the wallet’s built-in exchange.