Stablecoin

A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging it to a real-world asset, typically the US dollar, euro, or gold. Unlike Bitcoin or Ethereum, stablecoins aim to reduce volatility, making them useful for payments, savings, and DeFi applications.

What Are Stablecoins?

The core problem with most cryptocurrencies is price volatility. Bitcoin can lose 20% of its value in a day, making it impractical for everyday payments. Stablecoins solve this by maintaining a 1:1 value with an underlying asset.

The most widely used stablecoins are:
– **USDT (Tether)**: pegged to USD; backed by cash and cash equivalents
– **USDC (USD Coin)**: pegged to USD; backed by regulated financial institutions
– **DAI**: decentralised stablecoin backed by crypto collateral (issued by MakerDAO)
– **BUSD**: Binance-issued USD stablecoin

Types of Stablecoins

**Fiat-collateralised**: backed 1:1 by fiat currency held in reserve (USDT, USDC)
**Crypto-collateralised**: backed by excess crypto collateral to absorb volatility (DAI)
**Algorithmic**: maintain peg through algorithmic mechanisms; no direct collateral (TerraUST was a famous failure)
**Commodity-backed**: pegged to commodities like gold (PAX Gold)

Uses of Stablecoins

– Trading: hold stablecoins to park crypto gains without exiting to fiat
– DeFi: deposit in lending protocols to earn interest
– Cross-border remittances: faster and cheaper than SWIFT transfers
– Dollar savings: in countries with high inflation, stablecoins provide dollar exposure

Risks

– Centralised stablecoins (USDT) depend on the issuer’s reserve management and transparency
– Algorithmic stablecoins can collapse (as TerraUST did in May 2022, losing its peg entirely)
– Regulatory uncertainty: governments may restrict stablecoin usage

Practical Example

Meena earns freelance income in USDC from an international client. Instead of converting to USD and wiring through a bank, the payment arrives instantly. She stores her earnings in USDC on a non-custodial wallet, avoiding Indian banking delays and conversion fees, and converts to INR only when needed.

Key Takeaways

– Stablecoins are cryptocurrencies pegged to stable assets (usually USD) to minimise price volatility
– USDT and USDC are the largest, backed by fiat reserves
– Used in trading, DeFi, cross-border payments, and as a store of value in high-inflation countries
– Algorithmic stablecoins carry higher risk (demonstrated by TerraUST’s collapse in 2022)
– In India, stablecoins are classified as VDAs and taxed at 30% on gains, similar to other crypto