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Crypto regulation MiCA: what does it mean for stablecoins?

»Posted by on Sep 6, 2023 in Cryptocurrency exchange | 0 comments

what is a stablecoin

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what is a stablecoin

How do stablecoins work, and how many types are there?

Fiat-backed stablecoins are described as an IOU — you use your dollars (or other fiat currency) to buy stablecoins that you can redeem later for your original currency. Unlike other cryptos, with value that can fluctuate wildly, fiat-backed stablecoins aim to have very small price fluctuations. But that’s not to say stablecoins are a totally safe bet — they are still relatively new with a limited track record and unknown risks, and should be invested in with caution.

what is a stablecoin

Yield Volatility

Stablecoins have caught regulators’ interest worldwide due to their unique mix of fiat and crypto. As they are designed to maintain a stable https://www.tokenexus.com/ price, they are useful for reasons other than speculation. They can also facilitate high-speed transactions internationally at a low cost.

How to Stake Stablecoins?

  • The most popular type of collateral borrowed against FUSD was, of course, Fantom’s own FTM.
  • But like other investments, a falling economy or market can significantly impact a coin’s value, as many of them are tied in with traditional financial institutions.
  • In 2020 as the world entered Covid lockdowns, Bitcoin’s price was around $7,000 but then skyrocketed again to over $19,000 by November 2020.
  • According to Kaiko Research, the imminent MiCA regulation in Europe could reassess the scope of EURO-pegged stablecoins, issued and managed by companies based within the Union.

As the name implies, stablecoins are a type of digital currency that are designed to offer stability while benefitting from blockchain technology. They’re often pegged (i.e., have a fixed exchange rate) to a fiat currency, such as the US dollar. Tether (USDT) is the most popular stablecoin in terms of daily trading volume and the third largest cryptocurrency by market cap at the time of writing according to Coinmarketcap.com.

what is a stablecoin

The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility. Ethena is one of the newest players in the yield-bearing stablecoin sector, having introduced a new way of generating yields through a combination of LSTs and delta-hedging. Traders deposit ETH, LSTs, or USDT as collateral to obtain USDe, after which — similar to DAI/sDAI — USDe holders need to stake USDe to obtain sUSDe to receive yield.

Japan: the company Metaplanet purchases another $6 million in Bitcoin (BTC)

what is a stablecoin

The stablecoin issuer ensures stability of their cryptocurrency by keeping fiat currency as collateral with a financial institution. The stablecoin always has a set amount of fiat currency in reserve that’s proportionate to the stablecoins it has issued. For example, if a stablecoin issuer has one million U.S. dollars in reserve, it might only offer one million stablecoins, each worth one U.S. dollar.

Recent events have taught us that not all stablecoins are created equal. In May 2022, the meltdown of TerraUSD showed that not every stablecoin can guarantee price stability. Crypto investors can easily stake stablecoins and earn a tidy bit of passive income such as interest or yield as a result.

  • In theory, a U.S. dollar-based stablecoin is a token that will reside on a blockchain and always trade for one dollar.
  • However, it has been besieged by doubt around the reliability of its reserves for years.
  • According to its partner developers, Binance and Paxos, BUSD is 100% backed by an “equal amount” of U.S. dollars and treasury bills.
  • While some large projects have a good track record, there have also been many projects that have failed.

Pros and cons of stablecoins

Due to the highly volatile and convergent cryptocurrency market, substantial collateral must also be maintained to ensure stability. Stablecoins attempt to peg their market value to some external reference, usually a fiat currency. They are more useful than volatile cryptocurrencies as a medium of exchange. Stablecoins may be pegged to a currency like the U.S. dollar, the price of a commodity such as gold, or use an algorithm to control supply. They also maintain reserve assets as collateral or through algorithmic formulas that are supposed to control supply.

Algorithmic stablecoins use an algorithm to get as close as possible to their desired peg value and adjust as needed with the market. But like other investments, a falling economy or market can significantly impact a coin’s value, as many of them are tied in with traditional financial institutions. Theoretically, any stablecoin should be stable; most of them see their values fluctuate by no more than 1% or 2% daily.

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