What are stablecoins and how are they different from other cryptocurrencies?


The prices of Bitcoin, Ethereum and other popular cryptocurrencies have plummeted this week as investors cut losses and seek shelter in less volatile assets. one catalyst route this week There is growing concern over stablecoins, another class of cryptocurrencies that need to protect their buyers from sharp fluctuations in cryptocurrencies.

Read on to learn more about stablecoins.

What is a stablecoin?

Stablecoins are cryptocurrencies linked to reserve assets such as currencies (such as dollars or euros) or commodities (such as gold, oil, or real estate). It is so named because backing other assets makes the value of the stablecoin less sensitive to roller coaster price movements.

For example, the stablecoin PAXG or Pax Gold is pegged to the price of gold, while terraUSD is pegged to the US dollar. There are about 200 types of stablecoins around the world, according to to the Blockchain Committee. three as of Friday biggest By market cap, the stablecoins were Tether $78.6 billion, USD Coin ($49.9 billion), and Binance USD ($7.2 billion).

As of Friday, the total market value of stablecoins was $163 billion, according to with CoinMarketCap.

What are stablecoins used for?

Investors use stablecoins to protect their money. sudden price fluctuations It has to do with other cryptocurrencies. In effect, stablecoins act as tokenized versions of fiat currencies or other real assets with a fixed value.

Decentralized financial platforms like BlockFi and Celsius use stablecoins to lend cryptocurrencies to their customers. The reason they use stablecoins is that the value of collateral or currency-based tokens will not change significantly between the time a customer is approved for a loan and the time the cryptocurrency enters an individual’s digital wallet.

Advanced cryptocurrency investors can use stablecoins to avoid paying transaction fees on cryptocurrency exchanges such as Binance and Coinbase.

Are stablecoins really stable?

Cryptocurrency creators have marketed stablecoins as safe and predictable, but not always, as investors discovered this month.

For example, although pegged to the US dollar, the stablecoin terraUSD fell to 77 cents this week. Another dollar-backed stablecoin, Luna, fell below $1 on Wednesday night. Tether fell to 95 cents on Thursday.

Some investors were so outraged by the devaluation of the stablecoin that they filed a lawsuit against Coinbase on Thursday. The lawsuit was centered on GYEN, a stablecoin pegged to the Japanese yen.

“Investors placed orders with the belief that the coin was worth the yen as advertised, but the tokens they purchased were worth up to seven times higher than the yen.” lawsuit state. “Suddenly, GYEN’s value fell back to the peg. It was down 80% in one day.”

Why Are Some Stablecoins Falling?

Stablecoins have been sacrificed Sell ​​Bigger Cryptocurrencies it soon started high gear The Federal Reserve (Fed) has raised interest rates by half a percentage point. Higher interest rates coupled with rising inflation and supply chain problems are fearing investors will strain the US economy in the near future.

This growing economic uncertainty has caused many investors to move their portfolios from riskier assets, including stablecoins and other cryptocurrencies. According to CoinMarketCap, the price of most cryptocurrencies fell from 5% to 85% last week. data.

What are the concerns of government regulators?

US lawmakers are contemplating how to regulate the burgeoning cryptocurrency market, and stablecoins are at the center of these discussions.

In particular, stablecoins need security because of their fast-growing popularity and “vulnerability” because “backed by assets that can lose value or become illiquid during stress”, the Federal Reserve said. said. report Released on Monday. In the banking world, “run” is when all or most account holders withdraw money at the same time because the institution believes it will no longer exist.


Billions removed from the cryptocurrency market this week

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The Fed report also noted that the stablecoin sector is “very concentrated on the three largest stablecoin issuers, Tether, USD Coin and Binance USD, which account for over 80% of total market value” .

U.S. Treasury Secretary Janet Yellen reiterated her call to regulate stablecoins this week, noting how quickly a price drop could affect investors.

A stablecoin known as ” TerraUSD Experienced Execution and Rejected She told the Senate Banking Committee on Tuesday. “It simply shows that this is a fast-growing product, that it risks financial stability and needs an appropriate framework.”

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