What is a stablecoin?

Stablecoins are a type of digital currency acts like a digital dollar, offering a cheaper and more secure alternative to the banking system.

What is a stablecoin?

Stablecoins are a type of digital currency acts like a digital dollar. Stablecoins offer a cheaper and more secure alternative to the traditional banking system, and can be traded in the same way we share content on the internet.

For many marketplaces, stablecoins provide crypto onramps and offramps for users, plugging them in to the $1.3 trillion crypto world.

Stablecoins like USDC are issued by regulated financial institutions, backed by fully reserved assets, redeemable on a 1:1 basis for US dollars, and governed by membership-based consortiums that set technical, policy and other legal or accounting standards for the stablecoins.

The largest stablecoin in the world is Tether (USDT), a type of cryptocurrency which aims to keep cryptocurrency valuations stable, with a market cap of $62 billion out of the total stablecoin market cap of $113 billion. Being anchored or tethered to real world currency, Tether claims to provide much-needed protection from the volatility of cryptocurrencies.

Reserves are regularly attested by legal and accounting firms like Grant Thornton and others, but they are not always audited. Monthly attestations can usually be found on the company's public website. The attestation reports are intended to show, prove, and/or state that the dollars exist, particularly in an official capacity.

This regulatory hurdle is what establishes trust for most stablecoins, and this is what is allows many institutions to adopt Bitcoin and non-fungible tokens (NFTs) with reduced risk of price volatility or compliance headaches.

On July 8, Circle announced plans to become a public company by merging with Concord Acquisition Corp (NYSE:CND) in a SPAC deal. A SPAC is basically a publicly traded blank-check company, and merging with a SPAC has become a popular way to become a publicly listed company. Circle is one of the members of Centre, a consortium created by Coinbase. In December 2020, Circle announced a partnership with Visa to bring stablecoins to more brands worldwide and expand the Visa Fast Track program.

In April, Paxos, founders of the PAXOS stablecoin, announced it has closed a $300 million Series D round of funding to expand their blockchain infrastructure platform. Paxos has raised more than $500 million and with a valuation of $2.4 billion. Paxos claims to have settled over $3.5 trillion in transactions for global brands using digital currencies.

To learn more about stablecoins, read about tokenomics—the study of how the tokens work within a broader digital ecosystem. Some tokens have lockup periods, others will expire after periods of time, and some pay crypto dividends directly to the wallet of the users.