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How stablecoins stay stable, explained


How stablecoins stay stable, explained

Stablecoins use a variety of techniques to keep their value fixed, generally to a specific fiat currency like the U.S. dollar.

A fiat-backed stablecoin keeps prices level by storing fiat backing each coin on a one-to-one basis.

The first and simplest stablecoin is fiat-backed, notably the U.S. dollar, as well as the euro, yen and others, at a one-to-one ratio. So long as the underlying currency — or basket of currencies as Libra originally proposed — stays stable, the stablecoin will maintain its value. They are, essentially, backed by the “full faith and credit” of the fiat issuer, with a value defended by that nation’s central bank.

Far and away the largest of these is Tether, with a market capitalization of $62.2 billion at this writing. But other leading stablecoins include Circle and Coinbase’s USD Coin ($23 billion), Binance USD ($9.6 billion), and DAI ($4.8 billion). 

Tether long claimed to be backed 100% by U.S. dollars, one to one. After the New York Attorney General sued Tether, it was revealed that 26% was an IOU from the Bitfinex exchange, a sister company. Tether recently revealed its “cash reserves” contain about 3% cash.

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