All you need to know about stable coins

All you need to know about stable coins

February 3, 2022 0 By Maxim Hayden

What is a stable coin? 

A stable coin is a type of cryptocurrency coin that tracks the value of a specific fiat. No, not the European car manufacturer… fiat currency. This type of coin works in the same way that the US Dollar used to be tied to gold, before Nixon ended the gold standard. 

Unlike other cryptocurrencies, a stable coin attempts to peg its price to an external currency, like the US Dollar, a commodity or asset; such as gold, in the case of PAX Gold (PAXG), but we’ll worry about that one later. 

Example stable coins include Tether (USDT), the most widely used stable coin in the crypto-sphere, USD Coin (USDC), Coinbase’s native exchange stable coin, Binance USD (BUSD), Binance’s native exchange stable coin, or even TrustToken’s True GBP (TGBP), True CAD (TCAD), or True USD (TUSD). 

Although several of the stable coins listed above track the US Dollar, there are also those that track other currencies, such as the Great British Pound, or even the Canadian Dollar. Simply put, the purpose of a stable coin is to provide “stability”, reducing volatility compared to that of its unpegged counterparts, and to bridge cryptocurrency with traditional fiat. 

As an example, when buying coins on an exchange, whether it be Bitcoin (BTC), Ethereum (ETH), or any other altcoin for that matter, a fiat deposit is usually converted to a stable coin of the users choosing, before another cryptocurrency is purchased. The most widely used stable coins across most exchanges are Tether (USDT), and USD Coin (USDC). 

To give an idea of the sheer scale of some of the stable coins available, at the time of writing this Tether (USDT) is currently the third-largest coin by market cap, of over $70 billion, USD Coin (USDC) is the fifth-largest coin with a market cap of over $50 billion, and Binance USD (BUSD) is a top 20 coin with a market cap of over $15 billion. 

Can you stake a stable coin? 

Yes, just like most other cryptocurrencies, a stable coin can also be staked by a holder. Stable coin staking rates can be anywhere from low single digits to the delectable double digits that crypto is so well known for… depending on the exchange and the staking period, of course. 

This allows a user to not only invest their hard-earned money for an interest rate significantly higher than what a main stream bank would give, without the volatility that comes with Bitcoin (BTC), Binance Coin (BNB), or any other alt coin. 

How does a stable coin stay stable? 

In short, a stable coin can maintain coin stability via backing of a fiat currency, collateralization, or by using algorithmic mechanisms, that allow for the buying or selling of the asset, or its derivatives.  

In the case of Tether (USDT), each tether is backed by $1 USD, whereas each PAX Gold (PAXG) token is backed by one physical fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brink’s vaults.