Academy Author ◦ 21 Nov 2023 ◦ 4 min read

What Are Stablecoins — And How You Could Use Them

What Are Stablecoins — And How You Could Use Them

The cryptocurrency market is growing rapidly. The turnover on the exchanges is trillions of dollars. The value of individual digital assets exceeds the value of large companies. Investor interest is increasing. However, the risks remain. One tool for reducing risks is the so-called stablecoins.

Their main strength is the same as that of recognized fiat currencies, — relative stability. It is possible to make predictable calculations using them.

The most popular stablecoins are:

Now there are several types of stablecoins, the most common of which group them by the type of the underlying asset, i.e. the asset to which the cryptocurrency is linked:

  • to fiat money, for example, USDT (Tether, pegged to the dollar) and bitCNY (to the yuan);
  • to goods traded on the stock exchange, for example, precious metals and gas or it could be even crypto-backed stablecoins.

What are stablecoins used for?

Stablecoins are most often used to fix profits and to preserve the balance from drawdowns during jumps in the value of the main trading cryptocurrency.

Large investors sometimes transfer their profits "overnight" to a stablecoin to continue trading without losses in the morning.

In addition to the protective function, this type of digital currency is used for:

  • Everyday transactions
  • Optimized recurrent payments and transfers from card to card
  • Cheap international transfers, for example, for foreign workers
  • Guarding against hyperinflation of the local currency
  • Increasing the speed and quality of cryptocurrency exchanges to reduce dependence on bitcoin.

On some exchanges, it is already faster and cheaper to trade through a stablecoin. And it takes time and additional checks to enter fiat money into the system.

Also, this type of digital asset allows you to diversify risks: while the price of Bitcoin is changing a lot, you can store funds practically in euros or dollars.

The presence of stablecoins ensures the trust and acceptance of cryptocurrencies in general. Institutional investors use stablecoins, increasing the turnover of the industry as a whole, and increasing profitability for smaller investors.

Plus, the more trust in cryptocurrencies, the easier it is to use them in the real world when buying goods /services.

So, which stablecoin will suit you the most depends primarily on your goals. Often people who need to transfer money from one state to another in a quick transit (in a day or two), use Tether (USDT) because it has the best liquidity. The main thing here is not to keep large amounts of money in it for a longer time.

For the longer-term storage of a backup crypto cushion for a rainy day, it might be a good choice to collect a diversified portfolio from USDC, BUSD, and DAI.

Terra USD (UST) is not a reliable stablecoin for storage. It makes sense to go to it only if you are going to make money on staking.

Challenges and risks of stablecoins

Despite all the advantages, stablecoins have several risks to be reckoned with.

Firstly, not all of them are stable enough, despite the name – new projects appear, but do not always survive. It is reasonable to use well-established stablecoins and gradually diversify into others.

Secondly, by linking to other assets, they receive the following risks — the collapse of guaranteeing currency (if linked to it) and legal restrictions: linking to fiat currencies increases not only trust but also the number of requirements for mandatory execution. For example, Facebook decided to launch its cryptocurrency, which is based on different fiat currencies – and got mired in bureaucratic problems.

Thirdly, the owner of the stablecoin in most cases is one company with centralized management. In such cases maintaining trust and stability requires constant monitoring, audits, and inspections, as concentrating power in the hands of just a few people makes it easy to abuse. Even the popular Tether at some point (according to rumors) began to offer a larger volume of cryptocurrency than there were real assets. An investigation by the US Department of Justice has begun.

To sum up, stablecoins allow payments to be made quickly and at a low cost, which requires effective financial, organizational, and technical conditions. However, in the absence of a proper regulatory system, various risks may appear, which may cause undesirable consequences.