What is a Stable Coin?

Written by Token Authority Research Team
Posted August 22, 2018 at 8:00PM

Today, we’re going to take a look at a certain kind of digital currency that every digital currency investor should know something about: stable coins.

In today’s developing digital currency space, stable coins provide an invaluable service.

The value of these tokens is pegged to a fiat currency or asset, and this makes them largely secure from the volatility that runs rampant in the rest of the digital currency market.

Because they are largely stable, these tokens have the ability to provide shelter for investors during turbulent times. They can also act as the bridge between the world of fiat currencies and the world of decentralized assets.

To help you better understand stable coins and their potential, our team put together this educational article.

Through this article, you’ll not only have a better understanding of how stable coins can be used to better your everyday trading, but you’ll also be introduced to some of the more notable stable coins on the market.

Let’s get started.

The Two Major Benefits of Stable Coins

Stable coins can be used in two major ways.

  1. Stable coins can be turned to during market volatility to help investors protect their investment without moving fully into fiat currency.

  2. In today’s largely volatile market, stable coins can act as the bridge between decentralized currencies and fiat currencies. In short, they can provide investors with a digital currency that doesn’t fluctuate dramatically, making it a good digital currency for purchasing goods and services.

Let’s look at these two use cases in detail, starting with use case #1.

Say the market is having a bad day. Many of the digital currencies are falling, and investors are looking for ways to protect their investments. These investors often run up against one of the first big challenges of the developing digital currency market: liquidity.

In today’s market, if you want to own many digital currencies, you have to purchase them through a crypto-to-crypto exchange. That means in order to sell one currency, you may have to sell for Bitcoin and then move that Bitcoin into fiat currency.

Confusing, right? And it’s certainly a lot of hassle if you plan on investing in the market during the next upswing.

Now enter the stable coin. In these kinds of situations, stable coins could prove invaluable. They allow investors to move their digital assets into a more stable asset without exiting the fiat-to-fiat exchange altogether.

Now let’s look at use case #2.

The second major use for stable coins is as a form of payment.

While digital assets may one day stabilize enough to function as currency, right now many of them are still trapped in a volatile hype cycle. In short, they are too volatile to be used for that purpose yet.

Say you paid $3 in Bitcoin for a cup of coffee. Later that day, the price of Bitcoin shoots upward by $200. Now you’ve overpaid for your coffee. There needs to be consistency.

And that is where the stable coins come in. In the future, stable coins could be used as the bridge between decentralized assets and fiat currencies.

They could, in theory, help ease the transition into an entirely new digital payment system.

And in that way, they are unique.

But how do you get your hands on them?

Great question, and one a lot of investors start asking as they get further along in their crypto education.

There are multiple stable coins on the market, and investors have a lot of options when it comes to which token to turn to.

But for the purpose of this article, we’re just going to talk about two: Tether and TrueUSD.

Tether and TrueUSD: Two Stable Coins to Know

If there are two stable coins every investor should be aware of, our team believes those tokens are Tether and TrueUSD.

Let’s start by talking about Tether.

Tether

When it comes to stable coins, Tether is probably the best-known stable coin on the market.

The token launched in 2015 and has managed to attract a wide user base despite being embroiled in occasional scandal.

Tether was launched by Tether Unlimited, and the company claims that each token is backed by fiat currencies that are kept in reserve.

Today, there are two different Tether tokens: USDT (which is backed by USD) and EURT (which is backed by the euro).

And that’s great. But there are some issues investors should be aware of.

Multiple experts in the blockchain space have stepped up and criticized Tether over the course of its time on the market. These individuals believe the Tether token is not actually supported by anything or that there is no fiat currency in reserve.

In an attempt to follow up on these concerns, the U.S. Commodities Futures Trading Commission (CFTC) issued a subpoena for Tether’s financial records on December 6, 2017. It was a subpoena the company fought, further deepening concern from members of the digital currency community.

All that said, Tether is still the most easily accessed stable coin on the market. With a vast network of users, the token is also available on multiple major digital currency trading platforms.

Now on to TrueUSD.

TrueUSD

One of the reasons our team likes TrueUSD is that it is trying to tackle the centralization issues that have created so much controversy for Tether.

Put simply, TrueUSD is a blockchain-based stable coin that uses the TrustToken asset tokenization platform.

On its blog, TrustToken stated that TrueUSD “offers token-holders full collateral, regular attestations of escrowed balances, and legal protections against misappropriation of underlying USD.”

It works like this...

Within the TrueUSD system, U.S. dollars are held in the bank accounts of multiple trust companies. These companies have signed escrow agreements. This is better than having a bank account that is controlled by a single company, which would make the system far more centralized.

That said, TrueUSD is a bit harder for investors to get their hands on than Tether.

Currently, the token is only available on a handful of exchanges, including Binance and Bittrex. That said, Binance is a fairly large exchange. In fact, according to CoinDesk’s recent blockchain report for the second quarter, Binance has a good portion of the world’s total digital currency trading traffic. It also offers the most tokens, making it a good option for investors who want access to a wide range of assets.

That’s it for this week’s educational feature. We hope you enjoy this content and can use it in your everyday trading.

We would like to remind investors that digital currency trading is still highly speculative and should be approached with caution. That said, it is still a multibillion-dollar market, with the potential to grow dramatically in the coming years.

So just tuck every tool you learn about, like stable coins, into your toolbox.

Best of luck with your investments.

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