Crypto
What are Stablecoins?

What are Stablecoins?

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Cryptocurrencies have rapidly become an attractive option for bettors, but this has not come without scrutiny. The reason is simple: crypto assets are highly volatile. However, there is an answer to this issue—stablecoins. But how do these digital assets differ from cryptocurrencies like Bitcoin?

This guide will separate the facts from fiction by detailing everything about stablecoins. You’ll learn about their nature, functionality, and the risks and benefits of their use. Once we’re done, you’ll know exactly how stablecoins offer a more stable and secure esports betting experience.

What Are The Benefits Of Stablecoins?

A stablecoin is a cryptocurrency that is pegged to existing assets, such as the U.S. dollar, Euro, or gold. For this reason, they offer a more constant value, unlike digital currencies like Bitcoin (BTC) or Ether (ETH), which are known to have high price volatility.

In a sense, stablecoins offer the “best of both worlds” by combining the speed, security, and efficiency of traditional crypto tokens with the stability of fiat currencies. This makes stablecoins great stores of value—especially in the dynamic crypto ecosystem.

How Do Stablecoins Work?

Stablecoins maintain their stable value through several mechanisms integrated with blockchain technology and smart contracts, particularly on platforms like Ethereum. Let’s explore some of these methods in more detail.

Collateralization

Some stablecoins like Tether (USDT) are “pegged” 1:1 with fiat currencies. This means that the stablecoin issuers hold the exact value of that currency on reserve (either as cash in their bank account or treasury bonds) as the amount of the corresponding stablecoin in supply.

Supply Manipulation

Stablecoin issuers can also use smart contracts (i.e., special computer programs that run autonomously on a blockchain whenever specific conditions are met) to adjust the coin supply to match the market demand.

These smart contracts act like central banks, creating and destroying money to prevent price fluctuations. So, if the demand for a stablecoin rises, the smart contract issues more coins (quantitative easing). And if the demand falls, it removes coins from circulation (quantitative tightening).

Crypto ETFs

Another method that providers use involves stablecoins acting like a kind of exchange-traded fund (ETF). In short, they buy into various cryptocurrencies and issue their own tokens into the crypto market based on the value of these holdings.

In many respects, stablecoins bridge the gap between traditional and decentralized finance (DeFi) by recreating common banking functions like lending, borrowing, and trading in the absence of a centralized financial institution.

What Are The Different Types Of Stablecoins?

There are four main kinds of stablecoins in the crypto world. Here’s a review of each of them and how they work.

Fiat-backed Stablecoins (Collateralized)

Fiat-backed stablecoins like USDT and USDC are backed by conventional fiat currency reserves. To maintain the value of the stablecoin, issuers hold cash or cash equivalents that match or exceed the total circulating supply of the respective token.

Ultimately, the market capitalization and stability of the stablecoin’s price depends on retaining this collateralization. This makes audits and regular financial reporting crucial to verify the token’s parity with its fiat partner.

Crypto-backed Stablecoins (Collateralized)

Crypto-backed stablecoins are supported by cryptocurrency collateral and come from the DeFi space. Their defining feature is the requirement for over-collateralization, which means that more cryptocurrency value is deposited than the stablecoin’s issued value.

This extra collateral is necessary due to the inherent volatility of cryptocurrencies. An example is a stablecoin with a 150% collateralization ratio, where $150 worth of crypto is needed to mint $100 of the stablecoin.

Commodity-backed Stablecoins (Collateralized)

Commodity-backed stablecoins are tied to physical asset values like precious metals, oil, or real estate, providing lower liquidity and resistance to inflation. These stablecoins are attractive to investors wanting exposure to assets like gold without the physical challenges associated with holding them.

Algorithmic Stablecoins (Non-collateralized)

Algorithmic stablecoins rely on computer programs to maintain price stability and are not necessarily backed by reserve assets. For this reason, their sustainability has been scrutinized, as these stablecoins tend to die off when demand wanes—case in point: Luna’s TerraUSD (UST).

You should decide whether collateralized or non-collateralized stablecoins are right for you. In general, collateralized options are more common and easier to understand, while non-collateralized tokens offer greater privacy and potentially less risk.

What Are The Most Popular Stablecoins?

Are you in the market to purchase or swap stablecoins? Here are the top three most popular stablecoins, according to data in February 2024.

Tether (USDT)

Tether is the largest fiat-backed stablecoin by market cap ($95.99 billion). It’s the most traded cryptocurrency in the world, boasting a 24-hour trading volume that even tops Bitcoin. Tether claims to keep a 1:1 parity with the USD through reserves of cash and cash equivalents.

USD Coin (USDC)

USD Coin is the second most popular stablecoin by market cap ($27.34 billion), managed by a private entity called Circle. It is pegged 1:1 to the U.S. dollar and is available in more than 450 crypto exchanges. Importantly, USDC should not be confused with a CBDC (central bank digital currency).

Dai (DAI)

DAI stablecoin is the largest crypto-backed stablecoin by market cap ($4.86 billion). It is maintained by the MakerDAO protocol and uses a mix of crypto and fiat-backed stablecoins as collateral, including USDC, Pax Dollar (USDP), and Gemini Dollar (GUSD).

You can find even more stablecoins on crypto exchanges like Binance or Coinbase.

Why Do Bettors Use Stablecoins?

There are many use cases for stablecoins. 

For starters, they offer bettors the benefits of cryptocurrencies, including speedy, low-cost cross-border transactions on the blockchain, without the added volatility. This makes them a compelling medium of exchange and store of value.

They are also highly advantageous for esports betting. An esports tournament can feature new match-ups hourly, so stablecoins give esports bettors more control over when they want to deposit and withdraw their funds.

For long-term betting, stablecoins also hedge against the unpredictable price shifts of typical cryptos since they are tied to stable assets like gold. Beyond this, stablecoins provide opportunities in niche investments, like in the case of FACTOR-805, a stablecoin linked to real estate.

It’s worth noting that while stablecoins themselves are traded and recorded on the blockchain, the goods they represent are not.

Betting With Stablecoins

Stablecoins offer the stability of traditional assets and the efficiency of cryptocurrencies, making them a very appealing option to anyone interested in crypto. That goes double for esports bettors who use crypto to place their wagers. With stablecoins, you can get all of the efficiency of crypto, with none of the volatility.

It’s also important that you do your own research before you start using any of the options mentioned in this article. The figures we shared will no doubt change over time—they’re all from February 2024—and as you may know, this is a rapidly evolving space.

Looking to get started with crypto? Visit our dedicated esports betting page to get started today and place your bets on the top esports games today, including VALORANT, League of Legends, Counter-Strike 2, and Dota 2.

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Written byTHP

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