The algorithm desperately minted billions of LUNA in an effort to maintain the peg, but it was unable to keep up. Within a couple of days, the value of UST fell to just a few cents, while LUNA crashed to zero. A prime example is USD Coin, the parent company that holds U.S. dollar cash reserves equivalent to the total number of USD Coins in circulation.

Kaiko Research: a springboard for EURO-pegged stablecoin crypto

The cryptocurrency exchange Coinbase offers a fiat-backed stablecoin called USD coin, which can be exchanged on a 1-to-1 ratio for one U.S. dollar. Stablecoins are a type of cryptocurrency designed to maintain a stable price over time, pegged to the value of an underlying asset, like the U.S. dollar. They aim to offer all the benefits of crypto while attempting to avoid rampant volatility. The money in the reserve serves as collateral for the stablecoin – meaning whenever a stablecoin holder wishes to cash out their tokens, an equal amount of whichever asset backs it is taken from the reserve. Crypto-collateralized stablecoins are backed by other cryptocurrencies.

Stablecoins Are Essential to Decentralized Finance (DeFi)

But you could have to lock up $150 worth of ether (ETH) to create $100 worth of DAI. Although stablecoins are a type of decentralized currency, they have a more centralized structure. They are less risky than cryptocurrencies (which are constantly fluctuating in value) but still have the benefits of operating on blockchain technology. When moving money between multiple volatile cryptocurrencies, holding onto profits can be difficult.

Best Crypto Wallets of June 2024

In such a context, while OTC trading will continue to provide USDT-EUR liquidity, many traders might choose to rotate towards regulated alternatives like USDC. FRAX’s algorithm works by using ChainLink (LINK) price oracles that provide price data from the ETH/USD trading pair on UniSwap (UNI) to obtain the most accurate USD price. To the extent any recommendations or statements of opinion or fact made in a story may constitute financial advice, they constitute https://www.tokenexus.com/ general information and not personal financial advice in any form. As such, any recommendations or statements do not take into account the financial circumstances, investment objectives, tax implications, or any specific requirements of readers. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.

Instead, algorithms and smart contracts manage the supply of the tokens issued. This model is much rarer than crypto or fiat-backed stablecoins and more challenging to run successfully. For centralized issuers, this desire to make money leads to the controversy surrounding the transparency of reserves, as discussed above.

Pros and Cons of Yield-Bearing Stablecoins

This allows for more flexible and efficient use of reserves, but it also increases the risk of volatility. USDC launched in September 2018 with the aim of providing a safe haven to traders in times of volatility, as well as letting businesses accept payment in cryptocurrencies, due to the stable price of USDC. The following graph shows the price of bitcoin vs. the U.S. dollar (USD) compared to another fiat currency, the Canadian dollar (CAD), to see how much each currency fluctuates in relation.

• Stablecoins are digital assets that track the value of fiat currencies or other assets.
• But that’s not to say stablecoins are a totally safe bet — they are still relatively new with a limited track record and unknown risks, and should be invested in with caution.
• Pegged to the U.S. dollar one-to-one, USDC claims to be backed by U.S. dollar assets held in U.S.-regulated financial institutions.
• Experts say the DAI stablecoin is overcollateralised, meaning the value of cryptocurrency assets held in reserves might be greater than the number of DAI stablecoins issued.
• Recent events have highlighted that not all stablecoins are as stable as they claim.
• Using stablecoins as a trading pair for more volatile tokens like bitcoin can be a more efficient option for traders.

Fiat-backed stablecoin: TrueUSD (TUSD)

• Before, crypto investors and traders had no way to lock in a profit or avoid volatility without converting crypto back into fiat.
• This uncertainty can make both buyers and sellers hesitant to transact in crypto.
• Even for stablecoins that claim to be decentralised — Ethena, for example — leveraging centralised exchanges to hedge staked assets occurs.
• Returning to the Fantom maxi’s incredible story, they claim it all started with Fantom’s not-so-stable stablecoin FUSD, which has been worth anything but $1 for years.
• This allows for more flexible and efficient use of reserves, but it also increases the risk of volatility.