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Tl;dr: Stablecoins are tokens that represent fiat money, playing a critical role in bridging between the traditional fiat world, and the crypto ecosystem. Stablecoins act as a stable, trusted medium of exchange to buy, sell, save, earn, and transfer money around the world.
Stablecoins are digital assets with value pegged 1-to-1 to traditional assets like the U.S. dollar, gold, or the Euro. This makes it much easier to transfer money in and out of the crypto ecosystem without having to worry about significant short-term price swings in assets like Bitcoin and Ethereum.
For example, you can trade or purchase $1000 worth of USDC with traditional U.S. dollars, and allow that to sit in your crypto wallet – knowing that exact amount will remain stable. Then, if and when you want to send money to a friend, purchase a good, or buy Bitcoin or ETH, you can do so at your convenience.
Stablecoins are a key part of the DeFi (decentralized finance) ecosystem. DeFi supports many of the activities you would do in the traditional financial ecosystem, like lending money, borrowing, getting interest on your assets and more – but without the traditional intermediaries who normally capture most of the profits.
Most stablecoins are backed by traditional assets or currencies like U.S. dollars or gold. However, we are still in the early days of stablecoin regulations, so every stablecoin is managed differently. Therefore, it’s critical you do your own research to understand how and who manages the stablecoins you chose to hold. We’ve included information on most of the top stablecoins, below!
Stablecoins are a key part of the DeFi (decentralized finance) ecosystem that take advantage of crypto’s global, decentralized, permissionless infrastructure.
With stablecoins you can transact globally, reduce portfolio volatility, lend and borrow, and even earn yield on your crypto (up to 8% APY through Zengo Savings).
Here are 4 of the top ways stablecoins are used:
While Bitcoin and Ethereum are the most popular cryptocurrencies, their short-term price fluctuations make them difficult to use as a medium of exchange. Enter stablecoins! Stablecoins were created to solve two of the major issues with cryptocurrency — specifically, short-term price volatility, and the challenge of converting cryptocurrencies to fiat currency and vice versa.
The goal of a stablecoin is to achieve price stability – whether the coin is pegged to the U.S. dollar, Euro, or Korean Won, what you see is (ideally) what you get: A stable, dollar-like currency that can ride the magical rails of crypto: making it easy to send, receive, buy, sell, save, or invest instantaneously and around the world, without the need to pay fees to banks or money transfer companies.
One of the most important questions is how a stablecoin achieves price stability – how the stablecoin is collateralized, or how the coin is backed. Today, there are 3 ways to do so, each following a different approach:
Here are 4 of the most-used stablecoins:
Tether (USDT) was the first stablecoin ever created, and is denominated in U.S. dollars 1-to-1. Tether was created to solve two of the major issues that early adopters found with cryptocurrency — namely, the volatility of the market and the difficulty of converting cryptocurrencies to fiat currency and vice versa. Tether (USDT) is a cryptocurrency backed by an equivalent amount of U.S. dollars, making it a stablecoin. After Bitcoin and Ethereum, USDT is the third-largest cryptocurrency by market capitalization. It is used around the world by many people who need a way to transfer traditional fiat money into crypto, and vice versa.
However, unlike other stablecoins, its internal policies are not 100% clear, and there have been worries in the past that USDT is not backed 1-to-1 by the U.S. dollar as it claims to be. Learn more about USDT here. USDT is available on Zengo as an ERC-20 token.
USD Coin (USDC) is a stablecoin that tracks the U.S. dollar, and it currently runs on the Ethereum network. USD Coin was founded in response to the launch of Tether, the world’s first stablecoin. The founders wanted to create a stablecoin with even stricter, more transparent policies. USDC emulates Tether by providing a more stable and convertible cryptocurrency, but, in contrast to Tether, the company follows strict governance policies and explicit regulations for USDC creation and redemption.
USDC issuers must report their U.S. dollar holdings every month, which is published online by an accountancy firm for anyone to view. USDC operates within regulated frameworks and U.S. money transmission laws, working with established banking partners and auditors. Learn more about USDC here.
USDC is available on Zengo as an ERC-20 token.
TrueUSD (TUSD) is a stablecoin tracking the U.S. dollar built on the TrustToken platform and says it is fully-collateralized and transparently verified (clearly poking at other stablecoins, like Tether). Introduced in 2018, it aims to be a simple, reliable stablecoin without any complex algorithmic or unclear backings.
TUSD is available on Zengo as an ERC-20 token.
DAI: DAI is a decentralized stablecoin on the Ethereum blockchain that tracks the U.S. dollar and is managed by the MakerDAO community. Unlike many stablecoins which are backed directly by U.S. dollars in centralized bank accounts, DAI attempts to stabilize 1-to-1 with the U.S. dollar by locking assets into smart contracts on the Ethereum blockchain.
Zengo supports DAI as an ERC-20 token. Learn more here.
There are a few questions you should be asking yourself before purchasing or holding stablecoins. Here are a few of the top ones:
Look above to learn the answers for many of the ecosystem’s top stablecoins!
Friendly Reminder: Many stablecoins run on Ethereum’s ERC-20 token standard. This includes USDC, USDT, TUSD and DAI. Any ERC-20 token requires Ethereum (ETH) to send or trade, so make sure to have some ETH in your Zengo wallet! This ETH gas fee is paid to the Ethereum network and not to Zengo.
Q: Why do I need Ether (ETH) to trade or send ERC-20 token stablecoins from my wallet?
A: ERC-20 tokens run on the Ethereum blockchain as smart contracts. In order to execute a smart contract, the Ethereum network requires a fee (usually referred to as a “gas fee”) paid for in Ether (ETH). This fee is not paid to Zengo but rather to the Ethereum mining network for validating and executing your requested transaction.
Q: How can I learn more about stablecoins?
A: There are many great resources to learn more. Check out these articles from NerdWallet, Investopedia, and CoinDesk.
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