What is a stablecoin?

Stablecoins are a type of cryptocurrency that are pegged to real world assets, such as fiat currencies or commodities. This peg is what allows stablecoins, which are built on a blockchain, to retain their steady value.

For example, a stablecoin could be pegged to the US dollar, meaning the stablecoin will carry the same intrinsic value as the US dollar. Similarly a stablecoin pegged to gold is worth the same as the value of gold it represents.

Alternatively, instead of being linked to a currency or real world asset, some stablecoins can retain a steady value through complex financial algorithms.

Some highly regarded stablecoins in the market today are USD Coin (USDC), Binance USD (BUSD), Paxos (USDP), and Dai (DAI). The stablecoin market is booming right now, having recently reached a total market capitalization of over $100 billion USD.

What are stablecoins used for?

Stablecoins are often used as an entry point to cryptocurrency trading. Other cryptocurrencies, like Bitcoin, fluctuate in price on a constant basis, meaning that their volatility can be hard to manage. With their stable value, traders who hold assets in stablecoins can avoid market volatility and gain an easier introduction to the crypto world.

Traders who want to keep their money invested on one crypto exchange can also use stablecoins to go in and out of different investments without paying fees to ‘cash out’ to fiat.

Built on blockchain technology, stablecoins offer the ability to make payments and send remittances, both domestically and internationally, for a lower transaction cost and with near instant settlement speeds. For example, Meta’s Diem will be a stablecoin pegged to the US Dollar that aims to facilitate payments across Meta applications (Facebook, Whatsapp, Instagram, and more).

What is a CBDC?

If you have ever heard of stablecoins, you may have come across central bank digital currencies (CBDCs). Like stablecoins, the intrinsic value of a CBDC remains pegged to its corresponding asset — the national currency of the country and central bank in question.

You might have heard of some countries like China, Sweden and Thailand exploring the possibilities of launching CBDCs.

Issued by central banks, a CBDC aims to increase payment efficiency. The main difference between a stablecoin and a CBDC is decentralization. Stablecoins are decentralized, built on blockchain technology, while CBDCs are centralized, as they are issued and managed by a central bank.

We will likely see continued development in the CBDC space.

What are stablecoins’ risks?

When compared to other cryptocurrencies, which can fluctuate greatly in their value and put investors at risk, stablecoins pegged to real worlds could be considered non-volatile. However, some stablecoins are pegged to other cryptocurrencies, which means they are as volatile as their underlying crypto. As with any digital asset, it’s important to research a stablecoin carefully before purchasing.

Regulation of stablecoin issuers is an ongoing issue. For example, the President’s Working Group in the US published a report citing that stablecoin issuers should be regulated like banks. Developments like these may result in changing practices of certain stablecoins.

In order to hold a stable value, stablecoin issuers should keep reserves of the underlying real world asset to represent the exact amount of stablecoins they have in the market. For example, for every single USDC that Circle issues, one US Dollar should be held in reserve. Users seeking to enter the stablecoin market should choose a stablecoin issued by a company that has transparent, audited reserves, to ensure their funds are as secure as possible.

How Stablehouse uses stablecoins

On the Stablehouse platform, users can purchase stablecoins as a first step into the digital economy, avoiding the volatility of more high risk cryptocurrencies. Once comfortable with stablecoins, users are welcome to bridge their assets into a more diverse range of cryptocurrencies.

Storing your assets in stablecoin holding on Stablehouse means that you can earn up to XX% ROI, meaning that your money can earn more returns for you than when sitting in a traditional bank account. This is because Stablehouse’s team of wealth management experts have unique skills in investing assets under management to generate interest for users.