The crypto world is going wild for ‘stablecoins’ — here’s everything you need to know about them
The latest innovation in the fast-moving world of cryptocurrencies is the “stablecoin” – cryptocurrencies pegged to real-world assets such as the dollar or gold.
A report from crypto wallet provider Blockchain released this week found that “the number of active stablecoin projects has dramatically increased over the past 12-18 months and more than a dozen project teams have stated they plan to launch in the coming weeks/months.” There are now over 50 in development globally.
Here’s everything you need to know about the hottest new area of crypto:
What is a stablecoin?
“Stablecoins” are cryptocurrencies whose prices are linked to a real-world asset. In theory, they could be linked to anything, but the majority are linked to currencies such as the dollar or euro.
How do they work?
There are two main types of stablecoins: reserve-backed and algorithmic.
Reserve-backed stablecoins function a little like paper money used to when it was linked to the gold standard. Just as cash used to be ultimately backed by gold reserves in a central bank, reserve-backed stablecoins are backed one-for-one by reserves of the currencies they are pegged to.
Issuers of coins like USDC or Tether “tokenize” dollars by exchanging them for a stablecoin and depositing the dollars in a bank. Those dollars are then left untouched until somebody redeems the stablecoin for the dollars. It’s this confidence that the stablecoin can be redeemed that maintains the price peg.
The second type of stablecoin is one that is not backed by any reserves but instead controlled by an algorithm.
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