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LearnCrypto 101

What are stablecoins?

Lipsa Das
    What are Stablecoins?

    Key takeaways:

    • Stablecoins provide a “stable” store of value by tying their value to real-world assets such as USD or gold, or to other cryptocurrencies.
    • Fiat-backed stablecoins are the most reliable tokens for beginners to get started with, and are used across trading, DeFi, and payments.
    • You can directly purchase USDC through your Phantom wallet via credit cards, debit cards, or bank transfers.

    Crypto and volatility go hand in hand, right? Every time you invest in a digital asset, you're taking a gamble on the unpredictable price fluctuations. This can make it hard to time your investments and plan your portfolio.

    However, there's a class of crypto specifically designed to maintain a stable value: stablecoins. In this article, we’ll walk through what they are, why they matter, and how you can use them.

    What are stablecoins?

    Stablecoins are relatively stable cryptocurrencies that work by pegging their value 1:1 to other assets like fiat currencies, gold, or other cryptoassets. That means you can exchange a stablecoin for an equivalent amount of the asset they're pegged to. For instance, USDT (or Tether) is pegged to the US dollar, which means every USDT can be exchanged for one dollar.

    There are quite a few innovative ways that stablecoins maintain their peg. Let’s look at some of them.

    Types of stablecoins

    There are different types of stablecoins based on methods used to stabilize their value: collateralized, algorithmic, and hybrid. Algorithmic stablecoins automatically adjust the supply based on demand for that coin. On the other hand, collateralized “traditional” stablecoins typically use reserves held by custodians or trustees. Hybrid stablecoins are a mix of both collateralized and algorithmic stablecoins.

    Each one has its own benefits and weaknesses, but for beginners, we recommend sticking with collateralized stablecoins as they're the most secure and widely-used.

    Let’s look at some of the most common collateralized stablecoins.

    Fiat-Backed stablecoins

    As the name suggests, fiat-backed stablecoins use fiat currencies like USD and EUR as collateral. The key advantage of these types of stablecoins is that they're backed by a central-bank-issued currency which is inherently resistant to volatility.

    The most popular fiat-backed stablecoins include USDC and USDT. Both these currencies have regulated entities in charge of the token supply and storage of the assets that back it. For USDC, this entity is the Massachusetts-based company Circle, and for USDT, it's the Hong-Kong based company iFinex.

    Crypto-backed stablecoins

    Crypto-backed stablecoins are backed by a reserve of other cryptocurrencies, instead of traditional assets like fiat currency or commodities. Usually, crypto-backed stablecoins use reputable cryptocurrencies like Ethereum or Bitcoin for their reserves to avoid volatility as much as possible. Further, they're typically over-collateralized, which means they keep more cryptocurrencies than the stablecoins they issue to account for fluctuations in price.

    For instance, a popular crypto-backed stablecoin is DAI. DAI is issued by MakerDAO and is backed by a pool of other cryptocurrencies, including Ethereum. It uses smart contracts to automatically adjust the supply of DAI based on the value of its reserves.

    How stablecoins are used

    Stablecoins act as a bridge between real world currencies and cryptocurrencies. Being able to rely on the value of a token to remain steady opens up a lot of possibilities in crypto.

    Transfering and storing value

    Stablecoins are used widely in payments and remittances. You can transfer money across borders without going through complex bank processes or high payment processor fees. Further, people in countries with unstable economies use stablecoins to store and transfer value as they are pegged to a more stable currency like the US dollar.

    Trading crypto

    In an industry where the market can go up and down quickly, stablecoins make trading easier. By being able to trade a volatile token for a stable one, stablecoins allow traders to maintain dollar-backed wealth within the cryptocurrency ecosystem, without using a traditional bank. Traders can sell cryptocurrencies for stablecoins to secure profits or use stablecoins to invest quickly at the right moment.

    DeFi

    Stablecoins have become an important part of the DeFi ecosystem — like providing liquidity or collateral for borrowing and lending. The stability of stablecoins makes them an ideal form of collateral, as the lender can be confident that the value of the collateral will not suddenly drop.

    Getting started with stablecoins

    Ready to get started with stablecoins? Phantom’s makes it easy to purchase, sell, and swap USDC directly within the wallet. We support 160+ countries and offer flexible payment methods, such as bank transfer, debit card, and credit card, to help you buy and sell stablecoins.

    To get started, follow these steps to start using USDC with your Phantom wallet:

    1. If you don't have it already, download Phantom and create a new wallet. For help creating a new wallet, visit our setup guides.
    2. Navigate to your wallet and click the purple “Buy” button. Search “USDC” and you’ll get three different options to choose from — USDC on Ethereum, Polygon, or Solana. Choose your preferred chain and click “continue.”
    3. Choose your payment option (Moonpay, Coinbase Pay, Robinhood Connect, etc.) to process your stablecoin purchase.
    4. After you complete your purchase, your USDC will be directly credited to your wallet.

    Once you have USDC, you can use swap for other cryptocurrencies with our in-app swapper or use a variety of DeFi apps. Phantom makes it easy for you to swap, trade or use your stablecoins to interact with the entire crypto ecosystem.

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