Stablecoins

May 25, 2024

Overview

Stablecoins are cryptocurrencies pegged to fiat currencies like the US dollar, offering stability for everyday purchases. They can be backed by cash, crypto, commodities, or algorithms. Minting involves depositing an equal amount of real money to create new coins, maintaining their value. Increased demand for stablecoins like USDC and USDT boosts market liquidity.

2 min. read

2 min. read

2 min. read

How Stablecoins Work?

Stablecoins are a type of cryptocurrency designed to be stable by being pegged to the US dollar or another major fiat currency. Unlike cryptocurrencies, which can move wildly in price, stablecoins are not volatile. This makes them a more attractive option for everyday purchases within the blockchain space.

Stablecoin Creation

Stablecoins are designed to maintain a stable value as a less risky choice of investment compared to volatile cryptocurrencies. They do this by being "pegged" to stable fiat currencies, like the US dollar. There are different types of stablecoins based on what backs them: physical cash (fiat-backed), cryptocurrency (crypto-backed), gold, or real estate (commodity-backed). And even computer programs or smart contracts (algorithmic) that are executed to keep their value balanced.

Stablecoin Minting

Minting stablecoins is similar to printing more copies of a special coin that always stays worth $1. To create these new coins, someone (like the bank that issued the original coin) needs to put in an equal amount of real dollars (the backing asset). This keeps the total value of all the stablecoins balanced. Once the real money is deposited, they can create new digital copies of the stablecoin and send them to whoever requests them, which is called the minting process. This allows the supply of stablecoins to grow as more people demand them, but it is patterned on keeping the value tied to its corresponding real-world asset.

Stablecoin expansion

When the supply of USDC (USD Coin) or USDT (Tether) expands, it means more of these stablecoins are being issued. This usually happens because of increased demand, as people and institutions prefer stablecoins for their stability and use in trading and decentralized finance (DeFi). The higher supply improves market liquidity, making transactions easier. 

Disclaimer: The information provided in this research paper is for educational and informational purposes only. It does not constitute financial advice, investment guidance, or any solicitation to buy or sell financial instruments. The views expressed herein are those of the authors and do not necessarily reflect the opinions of Kollectiv.

2024