Stablecoins are cryptos that are linked to a reserve asset such as a currency (like USD or EUR) or a commodity like gold, oil or real estate. Because stablecoins are backed by other assets, their value is less susceptible to price fluctuations, hence the name.
Stablecoin PAXG, or Pax Gold, for example, is linked to gold prices, whereas USDC is linked to the US dollar. According to the Blockchain Council, there are approximately 200 different types of stablecoins in the world.
Stablecoins are used by investors to protect their funds from the volatile price swings associated with other cryptocurrencies. Stablecoins are essentially tokenized versions of fiat currency or other assets with a fixed value.
Stablecoins are used by decentralized finance platforms such as BlockFi and Celsius to lend crypto to their customers. They use stablecoins because the value of the collateral- or currency-backed tokens is unlikely to fluctuate significantly between the time a customer is approved for a loan and the cryptocurrency arrives in the individual's digital wallet.
Stablecoins may be used by more advanced crypto investors to avoid paying transaction fees on crypto exchanges such as Binance and Coinbase, many of which do not charge fees for currency exchanges for stablecoins.
Stablecoins have been marketed as safe and predictable by cryptocurrency creators, but as investors discovered earlier this year, this is not always the case.
Terra USD, Tether, and many other stable coins lost their pegs earlier this year, and with TerraUSD unable to recover, things have changed dramatically since then.
Wondering how the value of a coin is decided? Don't worry we've got your back, read here!
Stablecoins have been hit by a larger cryptocurrency sell-off, which accelerated shortly after the Federal Reserve raised interest rates by half a percentage point. Higher interest rates, combined with rising inflation and supply-chain issues, have investors concerned that the US economy will collapse in the near future.
Stablecoins' share of total crypto market value has been increasing, reaching new historical highs in mid-June. The share of stablecoins has been increasing in recent weeks, despite the total supply of all stablecoins dropping dramatically during the second quarter of 2022, experiencing one of the sharpest drops in history. Because of the failure of algorithmic stablecoins like Terra, the stablecoin industry has been associated with a lot of misinformation. Tether and other major cash-backed stablecoin issuers have assured their customers that they have not been impacted by issues such as the Celsius' crisis.
Another good take on stablecoins by Investopedia here.
In our opinion, Tether, USDC and BUSD are some reliable stablecoins that have minimal probability of failure.
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