What are stablecoins and how do they work?
Bitcoin and other cryptocurrencies offer fast, low-cost and borderless financial transfers. At the same time, crypto is well known for its volatility. Trading on the open market, and without a central bank or issuer to manage their price, the value is determined purely by supply and demand.
Stablecoins are blockchain tokens that aim to maintain a ‘peg’ to a real-world currency like the US dollar. By providing a stable store of value that lives on the blockchain (typically Ethereum) and can be integrated with other blockchain applications, stablecoins have become one of the most important asset types in the crypto space.
Why are stablecoins useful?
Stablecoins have become one of the largest and fastest-growing classes of crypto token. Tether (USDT), the most popular stablecoin, has around $40 billion in circulation, while the sector as a whole is worth over $60 billion. However, the total daily trading volume of all stablecoins is around $250 billion.
This indicates what stablecoins are used for. Traders use them as an alternative to fiat for buying and selling crypto, and as a way to store value, either for the short term or the long term, without moving money off exchanges into the banking system but still retaining control of their funds.
Additionally, stablecoins have become very popular within the DeFi sector, since they allow users to earn high yields on their funds without being subject to the market risk inherent in traditional crypto assets like ETH.
The main types of stablecoin
Stablecoins seek to maintain their peg to a fiat currency in a variety of different ways, each of which has benefits and disadvantages.
- Fiat-backed stablecoins are backed by cash reserves held in a bank account by the issuing company. They are centralised, which potentially introduces single points of failure, but tend to keep their peg well as they are backed 1:1. Users must trust the issuer to hold the reserves to back the coin fully, and issuers show varying degrees of transparency about their reserves. Well-known examples of fiat-backed stablecoins include Tether (USDT), USD Coin (USDC) and Australian Dollar Stablecoin (AUDT).
- Crypto collateralised stablecoins are decentralised tokens that keep their peg by ensuring they are backed by at least the equivalent value of crypto. Dai, the most popular decentralised stablecoin, can be generated against multiple different types of crypto collateral. If the value of the collateral drops below a certain point, it is automatically sold to cover the Dai. Decentralised stablecoins do not have the single points of failure inherent in fiat-backed coins, but may maintain a slightly looser peg because there is no issuer to redeem the coin at its intended price.
- Algorithmic stablecoins are still an experimental type of stablecoin that are not backed by any form of collateral. They are decentralised, and aim to maintain their peg by automatically increasing or decreasing supply to adjust supply and demand on the open market via a smart contract. No algorithmic stablecoin has succeeded in maintaining a long-term peg.
About $AUDT
AUDT is an Australian dollar-backed stablecoin that forms part of Chrono.tech’s suite of blockchain products and services. Every AUDT token is backed 1:1 by AUD.
AUDT are issued programmatically on the Ethereum blockchain when users deposit Australian dollars to the partner bank account. As an Australian blockchain business, the company is fully regulated by AUSTRAC, Australia’s financial intelligence agency, and works with a licensed Australian bank. AUDT can be held, transferred, traded against other crypto tokens, or redeemed for Australian dollars at any time.
For more information, visit https://audt.to.
