Cryptocurrencies are characterized by high volatility and are often criticized for lacking intrinsic value. To minimize this volatility and improve price stability, so-called stablecoins were created. These are cryptocurrencies whose value is pegged to fiat currencies, precious metals, a basket of various assets, or another cryptocurrency. Over time, stablecoins have become an alternative means of exchange, allowing users to transact without relying on traditional currencies.
Stablecoins are cryptocurrencies whose value is pegged to fiat currencies, precious metals, a basket of various assets, or another cryptocurrency.
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Commodity, Fiat, and Cryptocurrency Stablecoins
One of the main advantages of a stablecoin is that its value is "backed" by a physical asset existing outside the cryptocurrency ecosystem, and it is not directly connected to the highly volatile and interconnected crypto market.
A stablecoin should (at least in theory) be redeemable at a 1:1 ratio for the asset that serves as proof of its value. This asset may be U.S. dollars, gold, a basket of currencies, or other financial instruments.
There are three main types of stablecoins:
Commodity-backed stablecoins – Like traditional currencies, commodity-backed stablecoins derive their value from precious metals such as gold or silver. A popular example of a commodity-backed stablecoin is Digix Gold Token (DGX). DGX is a product of the Singapore-based blockchain company DigixDAO and is backed by gold.
Fiat-backed stablecoins – The most popular and widely used type of stablecoin, in which a traditional fiat currency, usually the U.S. dollar, backs the value of the cryptocurrency.
The largest stablecoins of this type include:
- Tether (USDT) – a digital currency whose value is always pegged to the U.S. dollar at a 1:1 ratio;
- USD Coin (USDC) – also pegged to the U.S. dollar at a 1:1 ratio;
- Binance USD (BUSD) – a stablecoin issued by Binance in partnership with Paxos;
- Gemini Dollar (GUSD) – a stablecoin issued by the U.S.-based cryptocurrency exchange Gemini and is not particularly popular;
- Paxos Standard (PAX), TerraUSD (UST), and TrueUSD (TUSD) – are also among the largest tokens by market capitalization and are pegged to the U.S. dollar at a 1:1 ratio. They are widely used on major cryptocurrency exchanges.
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- Cryptocurrency-backed stablecoins – In this case, another cryptocurrency serves as the collateral backing the stablecoin, and the entire process takes place on the blockchain. Projects of this type include Havven and DAI. The price of DAI is pegged to the U.S. dollar and is backed by a basket of other cryptocurrencies, which are deposited into smart contract vaults each time new DAI tokens are issued.
Tether: The Oldest, Largest, and Most Controversial Stablecoin
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According to available data, the largest stablecoin by market capitalization is Tether, with a market capitalization of $64.14 billion, placing it ahead of many popular cryptocurrencies.
Tether (USDT) is also the oldest stablecoin on the market and the most controversial due to the lack of financial audits confirming that every Tether token (the number of which continues to grow) is backed by real U.S. dollars. In 2017, many associated the unverified issuance of new USDT with the sudden rise in the price of BTC . The token itself was created in 2014 under the name Realcoin as a project of former Starbucks Vice President Stanley Hainsworth. Initially, the cryptocurrency was not successful, but everything changed after it was renamed Tether. At present, according to the Tether website, more than 64.14 billion USDT are in circulation.
Why Do People Use Stablecoins?
One of the main drawbacks of cryptocurrencies is their volatility—sharp price increases and declines that discourage many potential investors from using digital assets. Stablecoins were created specifically to address this issue and bring greater price stability to the cryptocurrency ecosystem.
Stablecoins were designed to bring blockchain technology closer to everyday users by creating an asset that closely resembles traditional fiat currency and is easy for people to understand. Over time, this type of asset may become an alternative to conventional fiat currencies in countries where the national currency is unstable. Stablecoins can also serve as a transitional means of payment in unstable economies, where traditional fiat money often loses its value rapidly.
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Where Can You Buy Stablecoins?
Stablecoins are available for trading on all major cryptocurrency exchanges, including Binance, Huobi Global, KuCoin, and BingX.
However, if you want to buy stablecoins with Armenian drams, for example using an Armenian bank card, you will need to register on an exchange and complete several levels of identity verification, which may take several days. This is possible, for example, on Binance, but keep in mind that you will have to pay the exchange a fee of at least 10% of the transaction amount, and you may not be able to purchase a large amount of stablecoins, as both local banks and the exchanges themselves impose card and transaction limits. We recommend using our service instead.
New stablecoins continue to be introduced regularly. As trading volumes grow, stablecoins are becoming an increasingly attractive way to bring more people into the cryptocurrency ecosystem.
Good luck!