Cryptocurrencies have taken the world by storm, birthing an entirely new technological and financial ecosystem to the digital era.
Stablecoins are a massively popular category of cryptocurrency designed to maintain their value, e.g. a $1 stablecoin equals a real US dollar.
This makes stablecoins one of the most versatile financial instruments in existence.
In this article, we’ll be explaining what stablecoins are, their advantages and disadvantages, and how you can use them in your everyday life – just like regular money.
How to set up a stablecoin wallet
You can set up stablecoin wallets on any computer or smart device with an internet connection.
You can purchase stablecoins through cryptocurrency exchanges such as Binance, Coinbase, Kraken, and Crypto.com. Additionally, you can purchase them directly through wallet providers such as MetaMask and Exodus.
Note: Not all providers allow you to easily spend stablecoins as you would regular money, and features may vary.
You can choose from a broad number of crypto wallet providers who support stablecoins and offer physical/virtual Visa and Mastercard crypto debit cards that allow you to spend your stablecoins directly, and occasionally receive cashback rewards.
Top stablecoin wallets/cards for everyday purchases
- PayPal
- Coinbase
- Crypto.com
- BitPay
- CryptoWallet.com
Step-by-step guide
- Step 1: Select your provider.
- Step 2: Register and complete identity verification (if necessary).
- Step 3: Fund your wallet using your bank account or other payment methods.
- Step 4: Purchase stablecoins through the platform.
- Step 5: You’re ready to spend and send!
How to use stablecoins for online purchases
Now that you’re set up with your stablecoin wallet, you’ll be wondering how you can go about using them for everyday purchases. Well, there are two ways.
Peer-to-Peer (P2P)
This is the good old-fashioned way of sending crypto. Depending on the company or merchant you are purchasing from, they may or may not be able to accept stablecoins directly. Those that do will often have a QR code or wallet address to which you can make your payment.
Crypto debit card/wallet
Within your crypto wallet app, you’ll be able to fund your wallet or virtual/physical debit card with your stablecoin of choice and spend it anywhere that accepts Visa or Mastercard. Platforms like PayPal and BitPay also allow you to use stablecoins as a payment option when making purchases online.
What can I buy with stablecoins?
As we’ve mentioned, what you can buy depends on how you intend to spend your stablecoins. If you’re sending directly from your wallet, be sure to research online to find stablecoin-friendly retailers.
If you have a wallet provider who also has a virtual/physical debit card, you can purchase or pay for anything you normally would. This includes food and groceries, phone bills, rent, utility bills, gift cards, VPNs, video games, clothing, and plane tickets.
Stablecoins explained
Thanks to their incredible utility, stablecoins have emerged as one of the most popular types of crypto in the world.
A stablecoin is a type of cryptocurrency that is designed to maintain its value just as regular (fiat) currencies do. They achieve this by backing the stablecoin with financial collateral (cash reserves, treasury bonds, gold, etc.), as well as algorithmic mechanisms.
They are particularly popular amongst crypto traders as they provide market liquidity to most trading pairs and offer a haven to shore up assets during volatile market periods.
As crypto adoption grows, so does the utility of stablecoins. Today, you can use stablecoins in your day-to-day life for purchases such as food, services, bills, and rent.
Popular stablecoins list
Tether (USDT): One of the biggest stablecoins, USDT pegs its value to the US dollar. Tether’s reserves aren’t 100% backed by USD deposits and instead uses a mix of cash, cash equivalents, corporate bonds, precious metals, and other investments.
USD Coin (USDC): Backed by a combination of fiat reserves and US treasury securities, the USDC stablecoin is one of the most widely adopted stablecoins on the market.
First Digital USD (FDUSD): This is another stablecoin backed with a basket of cash and cash equivalents to maintain its 1:1 peg with the US dollar.
PayPal USD (PYUSD): The PayPal stablecoin is backed by dollar deposits, US treasuries, and other cash equivalents, and you can use them just as you would use regular currency on the PayPal platform, amongst other things.
MakerDAO (DAI): This is a crypto-backed stablecoin that pegs its value to USD by depositing crypto assets into its smart contracts, which at a certain point create new DAI stablecoins.
Types of stablecoins
A stablecoin can use many methods to maintain its value. This can include backing the tokens with collateral such as cash, crypto, and other financial instruments, or pegging their value to commodities and assets such as gold.
Some are entirely algorithmic with no assets to back them, and others use a hybrid of all the above. So let’s take a look at the types of stablecoins available today.
Fiat-backed stablecoins
This stablecoin has its value tied to that of a traditional currency such as US dollar or the Euro (EUR). It is typically backed 1:1 by a majority reserve of fiat currency/cash equivalents such as treasury bills and bonds to maintain its value.
These are often the biggest stablecoins on the market. Notable examples include Tether (USDT), USD Coin (USDC), and PayPal USD (PYUSD).
Crypto-backed stablecoins
Similarly to fiat-backed, this stablecoin is either pegged to the value of another crypto or fiat currency, using a reserve of crypto assets, smart contracts, algorithms, and other complex mechanisms to maintain value.
Popular examples include Ethereum-based MakerDAO (DAI). Here deposit various crypto into a smart contract, and once enough the collateral has reached a certain level in the contract (150% or more), the user can mint DAI tokens.
Commodity/asset-backed stablecoins
As the name suggests, this is a stablecoin that pegs its value to a certain commodity/asset like gold, silver, oil, and even real estate. They’re not the best choice for day-to-day purchases as they are considered more of an investment vehicle for those looking to invest in commodities via crypto markets.
Popular examples of this include Pax Gold (PAXG), which is backed 1:1 by one fine troy ounce of gold, securely stored in the vaults of an audited custodian.
Algorithmic stablecoins
These are the true embodiment of decentralization. They are a unique class of stablecoin as they primarily leverage complex algorithms, smart contracts, and other mechanisms to maintain price stability, often without having any collateral to back them.
A common approach is to have an algorithm that regularly adjusts supply based on market demand and market activity.
Hybrid stablecoins
These stablecoins attempt to combine the best of both worlds, using both reserves of fiat/crypto/commodities to collateralize their value, and a string of technological mechanisms to maintain their peg.
Frax (FRAX) is a notable example as it is backed by on-chain collateral and uses smart contracts to balance the supply of FRAX against other assets to maintain its peg.
Pros and cons of stablecoins
Advantages of stablecoins
Efficiency: Depending on where you are in the world, stablecoins may be a cheaper and faster means of spending and sending money.
Accessibility: Anyone with an internet connection can access stablecoins, making them a powerful financial tool. Furthermore, you can spend them across millions of merchants.
Global reach: Stablecoins can be used for cross-border transactions, eliminating the need for currency conversion fees and other associated costs.
Disadvantages of stablecoins
Counterparty risk: Many stablecoins are owned and operated by centralized entities, and should these entities fail or face financial hardships, the stablecoin may suffer also.
Markets: Whilst stablecoins aim to maintain price stability, extreme market volatility or events can cause them to deviate from their peg, though this is often temporary.
Technical risk: Stablecoins are still cryptocurrencies, and therefore all the associated risks of hacking, smart contract flaws, and other vulnerabilities.
Consumer protections: Stablecoin transactions may not receive the same level of protection that traditional payment methods have, such as chargebacks or fraud protection.
Conclusion
Now that cryptocurrencies such as stablecoins have such significant ubiquity, their widespread adoption and usage will only increase as the technology evolves, and more companies find ways to accept and handle stablecoins.
With the likes of financial behemoths such as Visa and Mastercard increasingly supporting crypto debit cards that let users spend their stablecoins directly, you can now make purchases across millions of stores and platforms worldwide.