Stablecoin for Beginners
Dec 26, 2023
A stablecoin is a type of cryptocurrency that aims to closely track the value of a currency (USD, EUR, CNY, YEN, etc.) or commodities like gold.
The most used stablecoins are those that replicate the value of the Dollar, such as USDT, and others like DAI, crvUSD, FRAX, USDC.
There are stablecoins for other currencies, but they are more marginal.
There are centralized stablecoins, where for each unit of currency issued (a dollar, for example), the issuer holds an equivalent amount in FIAT currency in a traditional bank or in safe investments (or in commodities for gold).
There are also decentralized stablecoins, where the collateral consists of crypto assets. For example, DAI is collateralized with USDC, or crvUSD with ETH.
There are also algorithmic stablecoins; in this case, there is no collateral, but they have a bad reputation due to a problem encountered with LUNA and its algorithmic stablecoin, which plummeted to zero value.
There are also stablecoins that are not entirely stable since their goal is to replicate the value of a currency, including inflation, like the FPI, for instance.
From a regulatory standpoint, MiCA in Europe significantly tightens the ability to issue centralized stablecoins, as they will no longer be considered crypto assets but electronic money as of June 30, 2024.
Stablecoins allow one to exit a speculative position without having to convert cryptos into FIAT, which is often a tax-triggering event.
Conversely, they can also be used to obtain leverage by borrowing stablecoins against cryptos and using these stablecoins to reinvest in the market.
Finally, it's possible to lend these stablecoins to earn returns.
The opinion of Sophie.fi is that stablecoins are very practical, but let's not forget that Bitcoin was created to address the weaknesses of traditional currencies, and thinking of taking refuge in them for security might be illusory?