What is Stablecoin and how does it work?

Stablecoins solve crypto’s volatility problem with their stable price, which is pegged to and backed by other assets. With these coins, there’s no need to worry about price swings when transacting, trading and playing online. 

These are just a few of the things you can do with stablecoins. Find out how stablecoins work, what purpose they serve in the world of cryptocurrency and how they differ from fiat money despite their stable price below.

What is a stablecoin?

Stablecoins are a type of cryptocurrency that maintains a stable price by pegging its value to another asset. Fiat currency and other tangible securities like gold both qualify as such assets. 

Like other cryptocurrencies, they use blockchain technology as digital storage but use a different algorithm to ensure their tokens’ value does not fluctuate with the market. 

Stablecoins Explained (USDT and USDC)

How do stablecoins maintain their stability?

Stablecoins maintain stability through reserved assets that serve as collateral for every issued stablecoin. Most have a 1:1 ratio where one stablecoin is equivalent to one unit of the reserved asset.

However, stablecoins achieve this in different ways. For one, centralised fiat-backed stablecoins have an organisation or company that oversees the minting and burning of new coins based on demand. For example, Tether (USDT) has a private custodian that monitors the currency and holds an equivalent of the collateral in their reserves.

On the other hand, the decentralised crypto-backed stablecoin Dai (DAI) does this without relying on a governing body. Instead, they employ smart contracts built on the Ethereum blockchain to organise and oversee the collateral.

Types of stablecoins

Stablecoins in crypto markets differ based on their supporting collateral framework. Find out all about the four types of stablecoins below:

1. Fiat-backed stablecoins

As its name suggests, fiat-backed stablecoins have fiat reserves as collateral. Every coin is backed by an equivalent in fiat, keeping a 1:1 ratio. Centralised companies keep and control these reserves in private accounts. 

When a user cashes in their coins, the stablecoin's administrator transfers the equivalent fiat from the stablecoin's reserve to the user's bank account. Additionally, an equal number of stablecoins are removed from circulation or destroyed to maintain the ratio. 

Fiat-backed stablecoins are the most popular type since the country's relatively steady economy guarantees low volatility. Thus, most stablecoins such as Tether (USDT) and USD Coin (USDC) peg their values to the US dollar, the world's reserve and strongest currency. 

2. Crypto-backed stablecoins

Instead of having fiat reserves, crypto-backed stablecoins are backed by other cryptocurrencies like Bitcoin (BTC) and Ether (ETH). Because cryptocurrency prices fluctuate constantly, stablecoins rely on mechanisms like smart contracts to guarantee that each unit of their currency always trades at $1. 

Stablecoins backed by crypto are over-collateralised, meaning they don't maintain a 1:1 ratio and instead keep more reserve assets to reduce volatility risks. Dai, for example, is pegged to the US dollar but is backed by Ether and other cryptocurrencies worth 150% of its current supply.

3. Commodity-backed stablecoins

Stablecoins backed by commodities like gold and other physical commodities such as real estate, oil and precious metals are called commodity-backed stablecoins. These provide holders ownership to claim actual and tradable commodities. 

For example, you can trade Tether Gold (XAUT) with physical gold if you have a minimum of 430 XAUT, which is equivalent to the standard gold bar. 

4. Non-collateralised stablecoins

Tokens that aren't backed by assets are called ‘non-collateralised or algorithmic stablecoins’. These maintain a stable price through an algorithm that automatically increases and decreases the supply based on demand.

When demand is high, more stablecoins are issued to return the price to its normal level. Inversely, when demand is low, the supply is reduced by buying coins off the market. 

This type of stablecoin offers the maximum degree of decentralisation and autonomy since it provides stability under the principles of supply and demand. However, its viability depends on the number of users, and since there are no actual collateral reserves, there’s less security in the price stability.

Pros and cons of stablecoins

Stablecoins have become increasingly popular since their creation in 2014 because of their utility. They can be used in trading, lowering transaction fees and purchasing goods and services. However, they also come with disadvantages worth considering. 

Check out some of the benefits of stablecoins and their counterparts below: 

Pros

1. Daily medium of exchange

Compared to other cryptocurrencies, stablecoins work better as a medium of exchange since they’re not susceptible to price changes. Thus, you won’t have to worry about price slippage when using it for purchases.

2. Remittance

Sending remittances abroad can be expensive, with third parties adding high cross-border fees. But with stablecoins, you can send funds wherever you want without paying excessive fees, waiting for days and worrying about changing prices. It is due to the underlying blockchain technology that lets you send funds regardless of geolocation.

3. Online gambling

You can also use stablecoins as a betting option when playing your favourite online casino games here at Bitcasino. Just deposit funds to your account, and do not worry about crashing prices. With stablecoins, you can play anonymously and enjoy unique crypto casino perks.

4. Hedge against crypto volatility

Traders use stablecoins to protect their assets from price dips. During market fluctuations, you can trade your cryptocurrencies to stablecoins and ensure they won’t change in price. Once the market trajectory is positive again, you can sell them back for your preferred coin and resume trading as you like.

Cons

1. Centralisation

Most stablecoins, especially the fiat and commodity-backed ones, require a single authority to control the supply of their reserve assets. It makes them centralised, unlike most cryptocurrencies, and brings them under the control of a company that can make changes without consulting users. They can also be subjected to government regulations and be at risk of bankruptcy.

2. Transparency

When companies holding stablecoins say they have reserve assets, the public can only take their word for it unless they publicise their records. If they don’t, this can lead to questions about whether they can trust the company.

The lack of reserve transparency with certain stablecoins has been widely criticised. For example, the US government’s Commodities Future Trading Commission has fined and accused Tether of misstating their public reserves in 2021, saying they only held 27% of USDT’s equivalent supply in fiat. 

However, the company responded that the findings only tell that USDT’s reserves were not all in cash and one bank account and not that reserve assets didn’t completely back them.

Top 5 most popular stablecoins

Check the most popular stablecoins according to CoinMarketCap at the time of writing:

1. Tether (USDT)

Launched in 2014, Tether (USDT) is the world’s largest stablecoin and third-largest cryptocurrencyy, with a market capitalisation of $67.5 billion. At the time of writing, its price remains at $1.

Its price is pegged to the US dollar and backed 100% by Tether's reserves consisting of cash and commonly held cash equivalents such as US Treasuries and commercial paper. Tether Limited controls its supply by minting new coins for US dollars and burning them when exchanged for fiat.

2. USD Coin (USDC)

Initially released to the public as an ERC-20 token, USDC Coin or USDC is a stablecoin pegged to the US dollar running on the Ethereum network. It is backed by US dollars and treasury assets issued by the US government, providing additional security for cryptocurrencies.

Centre, a consortium founded by cryptocurrency exchange Coinbase and financial technology company Circle, launched the coin in 2018. Despite being managed by an institution, USDC is an open-source project, so anyone in its community can contribute and alter its code.

A token is generated when a dollar is added to the USDC system. When a user wishes to exchange their tokens for dollars, the tokens are destroyed to ensure the USDC system remains stable.

At the time of writing, it's the second-largest stablecoin and fourth-largest cryptocurrency, with a market cap of $51.8 billion and a price of $1.

3. Binance USD (BUSD)

Binance USD (BUSD) was created by the blockchain infrastructure platform Paxos and crypto exchange Binance in 2019 as a regulated stablecoin pegged to and backed by the US dollar. With a market cap of $19 billion and a price of $1, it ranks as the sixth-largest cryptocurrency.

Both companies publish monthly audits and attestation reports regulated and approved by the New York State Department of Financial Services (NYDFS) on their websites. It makes the company transparent and the coin a more secure option for consumers.

When you buy BUSD tokens, they transfer to Paxos where they are ‘burned’ and then converted into fiat. As an added security measure, Paxos delete tokens after every transaction so you can’t utilise them in future collateralization attempts.

4. Dai (DAI)

The DAI cryptocurrency is a decentralised stablecoin that maintains a constant value of $1. In contrast to stablecoins issued by a central authority and backed by dollars in a bank account, this currency is backed by collateral of various cryptocurrencies on the Maker Platform. These can be Ether (ETH), Basic Attention Token (BAT), Wrapped USD Coin (WUSD) and Bitcoin (BTC), among others.

The Maker Protocol and the autonomous organisation MakerDAO manages DAI's generation. All members can enact changes to DAI’s policy if they have the Maker governance token MKR.

It sits at the 13th spot in the cryptocurrency ranking with a market capitalisation of $6.8 billion. At the time of writing, its price remains stable at $1.

5. TrueUSD (TUSD)

TrueUSD (TUSD) is a token pegged to the US dollar that is fully collateralised. It's the pioneer digital asset launched on the TrustToken ecosystem, where its holdings are spread out among several banks and trust companies. The token uses a network of escrow accounts to mitigate counterparty risk and provide token holders with legal protection in the event of theft. At the time of writing, it’s the 47th largest cryptocurrency with a market cap of $1 billion and a price of $0.99.

Future of stablecoins

Stablecoins have become a staple in the crypto ecosystem, with Tether sitting at the 3rd rank after Bitcoin and Ethereum. However, even stablecoins, the gold standard of digital currency, are not without their own set of problems. For one, they face scrutiny from the US government due to their private reserves.

Thus, more and more centralised stablecoins are focusing on transparency and becoming regulated to avoid the watchful eye of the US government. For instance, BUSD’s monthly audits are regulated by the NYDFS, while TUSD is audited by the private firm Cohen & Company. Other companies like Tether publish their records on their sites and update them in real-time to prove transparency.

The future of stablecoins is heading towards government regulation to ensure consumer security. The US Securities and Exchange Commission (SEC) and Federal Reserve have issued urgent calls in the past to create a regulatory framework for stablecoins considering their popularity and wide use. 

With this, users can be more at ease that they’re trusting their money to regulated parties.

Can you use stablecoins in casino gambling?

Yes, you can use stablecoins to securely gamble on crypto casinos. As of writing, the most used tokens are BUSD, USDC and USDT. However, Tether (USDT) is mainly used by punters here at Bitcasino. 

Why gamble with stablecoins?

When you bet with stablecoins, you get the fast transaction speed of crypto without its volatility. This means you won’t have to worry about your jackpot having less value because of your chosen digital token. 

Today, online casinos like Bitcasino accept a wide array of cryptocurrencies, including stablecoin. Through this, you can experience seamless gameplay, security and stability. 

How to gamble with stablecoins at Bitcasino 

Bitcasino accepts stablecoins Tether (USDT) and Binance USD (BUSD) for your crypto bets. Learn how to deposit and play using these coins below:

Depositing Tether (USDT)

1. Log in to Bitcasino and click on the deposit button located in the top right corner of the screen.
2. Then, make sure your wallet is USDT. If it’s not, click the dropdown menu beside the wallet balance and choose Tether.
3. A QR code then appears. You can scan it with your crypto wallet and instantly send USDT or manually copy the wallet address and paste it to your wallet.
4. You can also choose to buy USDT with your credit card via Onramper. To do so, click the back arrow at the cashier’s upper left corner and choose Onramper. Enter the amount you want to buy USDT with then proceed.
5. You will be sent a notice as soon as your transaction is completed. Check your transaction history page at Bitcasino and find the funds reflected in your wallet.
6. You can now enjoy playing the wide variety of casino games available at Bitcasino. Just select USDT as your currency when playing.

Depositing Binance USD (BUSD)

1. Log in to Bitcasino then click the deposit button at the top right corner of the screen.
2. Click the current active wallet and change it to BUSD.
3. Scan the QR code using your crypto wallet app or manually copy and paste the wallet address to your crypto wallet app.
4. You’ll be notified once the transaction completes. You can then check it on the transaction history page at  Bitcasino and find the funds transferred to your wallet.
5. You can now play with BUSD! Just select it as your currency when playing.

Frequently Asked Questions: Stablecoins

What are the different types of stablecoins?

Stablecoins have four types depending on their collateral frameworks: 

• Fiat-backed - Backed by fiat currencies
• Crypto-backed - Backed by cryptocurrencies and powered by smart contracts
• Commodity-backed - Backed by commodities such as gold and real estate
• Non-collateralized - Not backed by any asset reserve; an algorithm powered by smart contracts maintains price stability.

Among these types, fiat-backed stablecoins are the most popular with Tether (USDT) the most traded.

What is the safest stablecoin?

USD Coin (USDC) is widely regarded as the most secure stablecoin currently available since every digital dollar of USDC is backed by fiat and short-dated US treasuries, therefore it is always redeemable 1:1 for US dollars. Plus, its market capitalisation is second only to Tether so it’s still liquid and widely traded.

What is the best stablecoin? 

The best stablecoin is the most used stablecoin, Tether (USDT). This digital token is also available at Bitcasino and you may just follow the simple steps above to deposit it. 

What are stablecoins used for? 

Stablecoins can be used in many different ways like transferring money, hedging volatility in crypto and even as a currency when playing games at Bitcasino.

Experience stablecoin gambling here at Bitcasino

Now that you know what stablecoins are, it’s high time to unleash the high roller spirit within you and gamble using stablecoins. Get all the perks and benefits when you play some of the best online casino games from the top online providers here at Bitcasino. 

Words by: Rasheed Custodio