This decreases the supply of the coin, causing the price to rise back to $1. When it’s above $1, users are incentivized to create the token, increasing its supply and lowering the price. DAI is just one example, but all crypto-backed stablecoins rely on a mix of game theory and on-chain algorithms to incentivize price stability. To buy stablecoins you’ll need an account with a crypto exchange or a digital wallet where you can buy crypto directly. Some services may not be available in all locations, so be sure to check whether the options you want are available where you live.
SEC drops key stablecoin investigation in win for crypto industry
Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The launch of SUUSD marks a key milestone in Sunami Network’s mission to offer top-notch financial tools to the market. The investigation continued for over a year, with the agency responding to a Fortune freedom-of-information request by confirming that it remained “active and ongoing” as of July 3.
How Stablecoins Make Money
Generally, people expect to be able to know how much their money will be worth a week from now, both for their security and their livelihood. Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.
Do stablecoins have any drawbacks?
- Crypto-collateralized stablecoins are backed by other cryptocurrencies.
- When it launched, it was originally fully backed by a combination of USDC and USDT as collateral, but over time this supply has diminished, to be replaced by an algorithm.
- It creates “trust” in TUSD by submitting the stablecoin’s reserves to frequent auditing and attestations by independent external parties.
- Holding more bank deposits also limits potential for expansionary money creation by stablecoins.
- In an industry where coins and tokens can crash overnight, there is a massive demand for currencies that mix blockchain benefits with the ability to track a more stable asset.
In this way, the DAI is 200% collateralized, which means it can endure a price drop of 50% without any worries. However, if the underlying asset’s price drops considerably, the DAI will be liquidated automatically to prevent its collapse. A good example is MakerDAO’s DAI, which is collateralized using Ethereum. DAI is created when users spend a specified amount of ETH to mint new tokens. It relies on an algorithm that ensures users always over-collateralize.
Reserve-backed stablecoins
Consumers’ choice to pay with plastic and the dominance of US card giants leaves UK businesses with little choice but to pay the fees set by these networks. A recent investigation by the UK’sPayment System Regulator concluded that Mastercard and Visa do not face effective competitive constraints in the UK, as there are no alternative providers. They are trying to cover the fees imposed by the likes of Visa and Mastercard for using debit or credit cards, with averageprocessing fees for debit cards said to be 0.28% of transaction value on every transaction. Therefore, USDC is considered safer than USDT thanks to the good coordination of operations and the transparency of the support system.
Without the ability to rely on the value of these coins, cryptocurrencies are less suitable for financial transactions that require a stable value over a longer period of time, such as real estate transactions. Fiat currencies are the currencies you and I use every day to buy groceries and services such as the U.S. dollar, the British pound or the Euro (depending on where you are in the world). Fiat currencies offer a stable and largely predictable amount of value, making what is a stablecoin them suitable for both short and long term financial transactions. Stablecoins attempt to bridge the gap between these stable options and cryptocurrencies, which have shown volatility but offer greater utility benefits. Precious metal-backed stablecoins use gold and other precious metals to help maintain their value. These stablecoins are centralized, which parts of the crypto community may see as a drawback, but it also protects them from crypto volatility.
