Stablecoins 101: Everything You Need to Know About Them

Written by
Lou Zarcal
Published on
February 15, 2023
Stablecoins 101: Everything You Need to Know About Them

What are Stablecoins?

Stablecoins are a kind of digital money that keep their value the same as a certain item or group of items, such as existing currencies like the US dollar. This means the value does not go up and down like other cryptocurrencies.

Stablecoins give you the benefits of other digital currencies, like fast and cheap transactions, without getting affected by their big price swings.

A question people often ask "is Bitcoin a stable coin?" – the answer is no. Bitcoin is a decentralized cryptocurrency that is not backed by any government or central authority whose value is determined by market demand. Its price can fluctuate significantly, making it difficult to use as a stable store of value or a means of payment.

What are examples of stablecoins?

Here are some examples of popular stablecoins:

1. USDC (Circle): this is issued by Circle and backed by the US dollar, with each USDC token representing one US dollar held in reserve.

2. USDT (Tether): pegged to the US dollar, with each USDT token backed by a corresponding US dollar held in reserve.

3. DAI: is decentralized stablecoin that is not pegged to a single fiat currency, but instead maintained through a complex system of smart contracts and algorithmic mechanisms.

4. PAX (Paxos Standard): is issued by Paxos and backed by the US dollar, with each PAX token representing one US dollar held in reserve.

5. BUSD (Binance USD): this is issued by Binance and backed by the US dollar, with each BUSD token representing one US dollar held in reserve.

6. GUSD (Gemini Dollar): this is issued by Gemini and backed by the US dollar, with each GUSD token representing one US dollar held in reserve.

These are just a few of the many stablecoins available on the market, each with their own unique features and advantages.

What are risks of stablecoins?

Although Stablecoins appear to be a favorable option as they do not experience the same level of volatility as other cryptocurrencies, there are several risks associated with stablecoins, including:

- Counterparty risk from default by the issuer or other parties.

- Regulatory risk from changes in laws and regulations.

- Liquidity risk from illiquid markets.

- Technical risk from complex technology and algorithms.

For example, Terra Luna experienced a collapse in value due to a combination of factors:

- A large sell-off of UST worth $2 billion from the Anchor Protocol caused the price of UST to drop to $0.91 cents.

- In response, people bought LUNA with UST, while the overall crypto market was also crashing.

- This caused LUNA's value to fall below UST, causing the UST to be de-pegged and causing everyone to sell off UST, leading to the fast crash of both UST and LUNA's values.

- The increased supply of LUNA along with the de-pegging of UST made investors lose confidence in the project, leading to its price continuing to crash until it was essentially worthless

In general, stablecoins pegged to a strong reserve of assets can be more stable than algorithmic ones. Choose your stablecoins wisely!

How do you buy or use stablecoins?

Stablecoins can be bought or used in several ways.

One of the most popular methods is through a cryptocurrency exchange, such as Binance, Coinbase, or Kraken.

To buy stablecoins on an exchange, you will need to create an account, verify your identity, and fund your account with a supported currency, such as USD, EUR, or Bitcoin. Once your account is funded, you can buy the stablecoin of your choice.

Another option for buying or using stablecoins is through a decentralized finance (DeFi) platform, such as Uniswap for the Ethereum blockchain or for the Solana blockchain. You can exchange other cryptocurrencies like ETH for stablecoins within that same blockchain like USDC on Ethereum.

What are the applications for Stablecoins?

One of the main applications of stablecoins is as a means of payment.

Stablecoins offer the advantages of traditional cryptocurrencies, such as lower transaction fees and faster processing times, combined with the stability of a fiat currency. This makes them an attractive option for businesses and consumers looking for a more efficient and stable alternative to traditional payment methods.

At Parallax, we make it seamless and easy for international hires to get paid in stablecoins, even if their employers don’t hold any cryptocurrencies. The goal is to help remote workers, freelancers, and more get paid faster & cheaper, leveraging cryptocurrencies and stablecoins.

You simply connect your Parallax US-based bank account to any payroll platforms your employers already use, or send an invoice. They can send you fiat, while you instantly convert into stablecoins of your choice.

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