Stablecoins are cryptocurrencies whose price is pegged to the value of a fiat currency or any other asset. The introduction of stablecoins finally created the option to hold and use a cryptocurrency with a stable price.
The first major use case for stablecoins was trading on centralized exchanges. Finally, traders could trade assets against a token that is not subject to high volatility and can actually store value. The growth of Defi has led to a huge demand for cryptocurrencies that guarantee price stability.
Over the years, many types of stablecoins have emerged with different price stability mechanisms. At Stables we only utilising fiat-backed stablecoins.
What are fiat-backed stablecoins?
Fiat-backed stablecoins have been the first stablecoins to emerge and have become the most prominent and used form of stablecoins over the last eight years. Fiat-backed stablecoins have the characteristic that each USD-pegged token issued is backed 1:1 by real USD.
Therefore, fiat-backed stablecoins require bank accounts to hold USD to back the stablecoin issuing. The most prominent fiat-backed stablecoin are $USDT, $USDC, $BUSD which are mainly used for trading on centralized and decentralized exchanges and as a store of value to hedge the high volatility in the crypto markets.
The direct backing with Fiat currency has made these types of stablecoins the most stable and long-lasting stablecoins in the market. However, the high stability of fiat-backed stablecoins comes with trade-offs in decentralization and capital efficiency.