Guide to Using and Spending Stablecoins

What are stablecoins?

Stablecoins are digital currencies tied to an underlying asset, usually a fiat currency like the US or Aussie dollar. Stablecoins are exactly what their name sounds like. Thanks to several ingenious mechanisms, the value of these cryptocurrencies remains tied to their associated assets – ensuring their price remains stable. 

Some stablecoins are “centralised” and managed by a company to ensure the coin maintains its peg. Such assets are usually collateralised 1:1. This means for every 1,000 USD-based stablecoins issued, the company would hold USD $1,000. 

On the flipside, some stablecoins are “decentralised” and instead managed by an algorithm. These smart contracts automatically perform certain actions depending on the supply and demand of the token. 

Why are stablecoins so popular?

Head to any crypto analytics site and sort by trading volume and you will find stablecoins dominate the top five. Stablecoins are a powerful tool for traders and longer-term crypto investors due to their constant value. These assets provide the benefits of cryptocurrency – fast settlements, decentralisation and low fees – while avoiding some of the volatility risks. 

High-frequency traders can keep a large supply of stablecoins in their accounts to quickly capitalise on profit opportunities without worrying about the coin plummeting in value. Additionally, stablecoins can help users interact with popular DeFi products such as liquidity mining or staking. 

What are the most popular stablecoins?

USDT: Tether (USDT) is one of the crypto industry’s oldest and most-used stablecoins. The digital currency has been around for over a decade and – despite some controversy over the company’s transparency – reliably maintained the value of one US dollar. The asset is available on over fourteen blockchains and is regularly the most-traded cryptocurrency.

USDC: USDC is a fiat-backed stablecoin issued and managed by fintech company Circle. The coin was incepted in 2018 and has since become one of the most trusted stablecoins in the world. USDc is redeemable 1:1 for actual US dollars.

DAI: DAI is the world’s most popular algorithmic-based stablecoin. Like USDC and USDT, DAI is pegged to the US dollar. However, instead of being backed by cash reserves, DAI maintains its value thanks to a complex algorithm that relies on ETH as collateral. 

PAXG: Stablecoins that mirror fiat currencies rule the roost – but stablecoins can theoretically track any underlying asset. PAXG, a stablecoin that follows the price of gold, is one such example. In this instance, tokenisation solves the issues with liquidity and storage that come with buying gold. PAXG is backed by real, physical reserves at the Paxos HQ.

What can you do with stablecoins?

Spend

Stablecoins are fast becoming the bridge that connects the blockchain world with the “real world”.  Several companies offer debit cards that can be loaded with reputable stablecoins and spent at participating outlets. Prominent Aussie businesses like Stables have even partnered with payment gateways like MasterCard. This means you can spend stablecoins as you would AUD – in-store and online, while enjoying the benefits of the blockchain.

Send

A major advantage of the blockchain is the ability to send money cross-banks – and even cross-borders – at a fraction of the cost and time compared to traditional methods. Stablecoins can be sent to family and friends just like fiat currency, but without worrying about business hours and settlement times. International transfers are much more efficient too, as an app like Stables gives you access to recipients from over 130 countries. 

Related: Stables review

Trade

Stablecoins are still primarily used as a trading partner for some of the crypto world’s top coins. Because it’s easier to access on-chain assets than depositing and processing fiat, stables are often the preferred trading pair for assets like Bitcoin and Ethereum. Additionally, stablecoins unlock the world of decentralised finance, where savvy investors can leverage decentralised exchanges and other profit opportunities using coins like USDC.

You can also buy stablecoins on one of the several cryptocurrency exchanges in Australia.

Risks of stablecoins

The whole point of stablecoins is that they present less risk than normal cryptocurrencies due to a lack of volatility. However, this does not mean that these digital currencies come without potential danger. 

De-pegging is by far the biggest risk of stablecoins. This occurs when the price of a stablecoin becomes detached from its underlying asset. Most reputable companies have measures in place for if this happens, and USDT and USDC have recovered quickly from previous de-pegging events.

However, the story doesn’t always have a happy ending. In May 2022, one of the world’s most popular stablecoins (Terra USD) de-pegged and immediately bled value, eventually becoming worthless. This incident wiped billions of dollars from the industry and was a major catalyst in the lengthy crypto winter that followed.

Malpractice by the company behind UST has been alleged as a key reason for the stablecoin’s catastrophic collapse. This is why it’s important to research the businesses issuing each coin to ensure they have a reputable track record and have practices in place to avoid a similar crash.