Content
- Franklin Templeton, Citigroup turn to Solana for next-gen financial services
- Top Stablecoin Tokens by Market Capitalization
- Fiat-Collateralized Stablecoins
- Cryptocurrency-backed stablecoins
- Cryptocurrency & Digital Assets
- What is the safest stablecoin to hold?
- VanEck reports surge in Bitcoin interest amid growing institutional, sovereign adoption
Examples of cryptocurrency-collateralised stablecoins include Dai (DAI) and Wrapped Bitcoin (WBTC). Scorechain solution supports Bitcoin analytics with Lightning Network detection, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger, Tezos, and Tron with TRC10 and TRC20 tokens. The software can de-anonymize the Blockchain data and connect with sanction lists to provide risk scoring on digital assets, transactions, addresses, and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation https://www.xcritical.com/ can report suspicious activity to authorities with enhanced due diligence.
Franklin Templeton, Citigroup turn to Solana for next-gen financial services
However, since cryptocurrencies are so volatile compared to fiat currency, crypto-backed stablecoins are usually overcollateralized to help maintain their peg during times of market volatility. For instance, the Dai (DAI) stablecoin issued by MakerDAO is collateralized at 150%, meaning every 1 DAI in circulation is backed by 1.5x its equivalent value in Ethereum (ETH) or other cryptocurrencies. Cryptocurrency-backed stablecoins are issued with cryptocurrencies as collateral, conceptually similar to fiat-backed stablecoins. In many cases, these allow users to take out a loan against a smart contract via locking up collateral, making it more worthwhile to pay off their debt should the stablecoin ever decrease in value. In how do stablecoins work addition, to prevent sudden crashes, a user who takes out a loan may be liquidated by the smart contract should their collateral decrease too close to the value of their withdrawal.
Top Stablecoin Tokens by Market Capitalization
Analyzing historical Blockchain data enables AI to identify trends, patterns, and potential risks, resulting in smarter contract design and decreased financial uncertainties. USDC has gained traction among businesses and individuals who wish to transact in cryptocurrencies but are hesitant due to the high volatility of other digital currencies. With USDC, transactions can be conducted quickly, cheaply, and securely without the risk of losing value due to market fluctuations. USDC can be used for a wide range of purposes, including remittances, payments, and peer-to-peer transactions. Investors and users appreciate stablecoins as a way to temporarily park their assets in a secure and non-volatile form.
- Many stablecoins are backed by the U.S. dollar (USD), including popular stablecoins like Tether (USDT), USD Coin (USDC) and First Digital USD (FDUSD).
- While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.
- For instance, one of the most popular stablecoins — Tether (USDT) — is commonly equal to US$1.
- At a market cap of $66.9 billion, USDT is currently the third biggest cryptocurrency, behind Bitcoin and Ethereum (ETH).
- It’s common knowledge that cryptocurrency prices can drastically rise and fall within a short period of time.
- For example, the organization issuing a stablecoin typically sets up a reserve at a financial institution that holds the underlying asset.
- This makes bitcoin more suitable as a payment method, especially for small value transactions.
Fiat-Collateralized Stablecoins
Stablecoins, on the other hand, are designed to maintain a stable value relative to a specific asset or a pool of assets. Stablecoins are typically pegged to a currency or a commodity like gold, and they use different mechanisms to maintain their price peg. The two most common methods are to maintain a pool of reserve assets as collateral or use an algorithmic formula to control the supply of a coin.
Cryptocurrency-backed stablecoins
If there’s a chance the $5 in crypto a customer paid for a cup of coffee today will only be worth $4 tomorrow, that’s a bad deal for the merchant. It’s important to note the risk of depegging may be higher for algorithmic stablecoins than for other types that have sufficient and transparent reserves. During the same time, the broader crypto market was experiencing a sell-off. Both these factors occurring simultaneously sent the stablecoin spiraling, making it essentially worthless overnight. Another challenge the crypto industry faces is that it’s relatively slow and expensive to convert dollars into crypto, and vice versa.
Cryptocurrency & Digital Assets
The Gemini Dollar has increased by a few cents several times in the last year as traders poured money into it. Ironically, many of those investors’ funds had come from Tether—which has previously sunk to as low as $0.51 on some exchanges. As such, stablecoins can be considered ‘relatively’ stable, rather than absolutely stable—particularly when compared to volatile assets like Bitcoin. Many exchanges—including Binance, the world’s largest—don’t let traders buy fiat currency, and only let them buy and sell cryptocurrencies. This means it’s often tricky for investors to swiftly cash out their cryptocurrencies when the going gets tough.
What is the safest stablecoin to hold?
They are designed to be used the same way — as a medium of exchange to buy and sell goods and services, just like private stablecoins. But unlike private stablecoins, CBDCs would be issued by a country’s central bank (like dollar bills) and would carry the same guarantee as paper currency. Collateralization means that a stablecoin issuer essentially has enough reserves set aside — U.S. dollars or gold, for example — in case a surge of its customers decide to redeem their stablecoins for fiat.
Stablecoins just sound like the digital money I already use in my banking app. What’s the difference?
Lastly, investing in stablecoin-backed assets or using stablecoins for trading pairs on crypto exchanges can also be profitable. It’s important to research and understand the risks involved before engaging in any of these methods. As its name suggests, a stablecoin is a type of digital cryptocurrency that is developed to maintain a fixed or stable value. As highly volatile assets, cryptocurrencies can be difficult to use everyday transactions. A vital role of any currency is its ability to act as a medium of exchange and a storage of monetary value. For example, if you plan to purchase apples three days from now using Ethereum, the number of apples you will be able to purchase could swing widely in that three-day span.
VanEck reports surge in Bitcoin interest amid growing institutional, sovereign adoption
It’s not unlike a bank having enough cash on hand in case of a bank run by its customers. Traditional banks are subject to stringent requirements for the amount of cash they must hold to meet customer redemption expectations. Recognizing the risks, some crypto firms have moved toward a voluntary “proof of reserves,” or “PoR,” but there is not yet an industry or government standard for doing this. USDC has gained popularity for its stability, transparency, and accessibility. It is a popular choice for traders, investors, and businesses looking for a reliable digital currency that is not subject to the volatility of other cryptocurrencies like Bitcoin and Ethereum.
It is possible for stablecoins to maintain overcollateralized positions under certain circumstances. TrueUSD was launched in 2018 by TrustToken, a fintech company that specializes in creating tokenized assets. The stablecoin is one of several that TrustToken offers, with others including TrueGBP, TrueAUD, and TrueCAD, each pegged to their respective fiat currencies. In addition to its peg to the U.S. dollar, Tether has also introduced other stablecoins pegged to other currencies, such as the euro and the Japanese yen. This allows traders to hedge against volatility in other fiat currencies and offers them more options for stablecoin trading.
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Algorithmic stablecoins have proved to be less reliable, and are more prone to sell-offs when the market loses confidence. For example, in May 2022, it became depegged from the dollar and lost almost all of its value. In March 2023, USD Coin (USDC) lost its dollar peg, dropping to as low as 87 cents, as a result of $3.3 billion of reserves held at the failed Silicon Valley Bank (SVB). When the bank collapsed, USDC holders quickly redeemed over $1 billion of USDC for dollars, causing the dramatic price slippage. While these drops don’t seem large, they can have profound impacts for businesses that are using them to settle payments or that hold a large volume of them on their balance sheet. Fiat-collateralised stablecoins (also known as off-chain stablecoins) are backed by reserves of traditional fiat currencies, such as the US dollar, held in a bank account or custody service.
The business models and revenue streams of stablecoin companies vary depending on whether they are a centralized stablecoin or a decentralized one. Bitcoin is largely unregulated around the world, but many countries and jurisdictions do recognise it as a payment method, including the US, Canada, EU, UK, Australia and Japan. Stablecoins are also commonly used as a non-custodial savings account to store personal savings or as collateral in DeFi to generate returns and engage in yield farming strategies. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
With that in mind, four types of stablecoins, based on the assets used to stabilize their value, have been created. Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for everyday transactions.
It can also swing the other way where the consumer gets the short end of the bargain. We all remember the infamous story of the person who bought 2 large pizzas in 2010 for 10,000 Bitcoin (valued at $690M at the all-time-high price in November 2021). Member firms of the KPMG network of independent firms are affiliated with KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. © 2024 Copyright owned by one or more of the KPMG International entities.
Initially, Tether tokens were minted on the Bitcoin blockchain via the Omni Layer protocol. Today, USDT can be issued on many blockchains, including Bitcoin, Ethereum, EOS, Tron, Algorand, and OMG Network. USDT can be used like any other currency or token on supported networks. Although the value of the reserve should theoretically exactly match the value of the issued coins, Tether has admitted that its reserves cover most but not all of the coins it has issued. Barring a run on the cryptocurrency, that reserve is sufficient to secure and stabilize the value of users’ holdings.
These are called algorithmic stablecoins, and they can be riskier than stablecoins backed by assets. Stablecoins with tried and tested technology, deep liquidity and an experienced management team are more likely to withstand market shocks and navigate evolving regulations. Fiat-collateralised stablecoins present businesses with the easiest way to bridge traditional and cryptocurrency payment and settlement rails, and so support a flexible approach to stablecoin adoption. Using this criteria, businesses should first consider Tether, USD Coin, Binance USD, True, Pax Dollar and Gemini Dollar. A new draft bill in the United States proposes that the Federal Reserve approves any non-bank stablecoin issuers, including those located abroad but offering their stablecoins on US exchanges.
In addition to its algorithm-based stablecoin are the Reserve Rights utility token (RSR) and a selection of other cryptocurrencies that are held as collateral to back RSV stablecoins. It is possible to collateralize stablecoins with other cryptocurrencies. In that case, the coin’s value might be pegged to the euro, but the reserves would be held in cryptos. If stablecoins aren’t properly regulated, there’s concern from governments that they could also enable illicit financial activity like money laundering and tax evasion.