Just What Exactly Is a Stablecoin?

Photo by Nick Chong on Unsplash

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

As cryptocurrency comes of age, thousands of investors continue to join the fray. The excitement surrounding the market is palpable and has crossed into popular culture. Tesla Inc. TSLA CEO Elon Musk is the unofficial title of Dogefather of Dogecoin (DOGE) and Jack Dorsey, CEO of Twitter TWTR, has sold the first tweet as a non-fungible token (NFT).

Much of this excitement can come from the possibility of reaping large returns on investment. People stand to make a lot of money in the market. But the truth is, they stand to lose a lot, too.

The cryptocurrency market is famously volatile, and stablecoins were created as a result of this volatility. So, what is it?

In simple terms, a stablecoin is a cryptocurrency whose value is tied to a real asset. As the value of that asset fluctuates, so too does the crypto. The most popular among these — Tether (USDT) and USD Coin (USDC) — are tied to the U.S. dollar. This means that for each Tether in circulation, $1 should be in the bank. If there are 1 million Tether in circulation, $1 million should be in an account.

These coins never fluctuate much in their relative value, always staying within a fraction of a percent of the U.S. dollar. It also means that they are subject to the inflationary tendencies of the dollar. For many, though, they provide an easy way to transact within the cryptocurrency ecosystem without fear of something like a flash crash.

Stablecoins have attracted some controversy over the years, especially surrounding the 1-to-1 backing of currencies like Tether. It was an open question for a while whether Tether had $1 sitting in the bank for every 1 of its coins in circulation. An audit showed that it did, but the fear remains that this could be a possibility in the future.

A few alternatives exist to the 1-to-1, coin-to-fiat model. A stablecoin can rely on smart contracts that buy and sell according to supply and demand, acting much like a reserve bank. Another option is to use a hard asset, like gold. This is an attractive alternative to many, as it may help avoid the devaluation that comes from the inflation of currencies.

A project that offers another alternative is AABB Gold token (AABG), created by Asia Broadband Inc. AABB. According to the company, AABG is linked to real gold reserves, but it is not a stablecoin. That is because its valuation is not capped. The company believes it will offer the stability of a stablecoin with the growth potential of a traditional cryptocurrency. The price floor of AABG is fixed by the spot price of 0.1 grams of gold, but the upside is limited only by market demand.

If you’d like to know more about the project, check out the website here.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.