- Stablecoins are crypto tokens pegged to a fiat currency or a commodity, giving them a relatively stable price.
- They are less volatile than bitcoin and play an important role in decentralized finance.
- But regulatory bodies have raised concerns about stablecoins like tether, which is the largest by market capitalization.
Stablecoins are causing one of the hottest debates in crypto right now. While advocates envision them overtaking bitcoin and leading the decentralized finance transition, detractors have questioned the lack of regulation in the sector.
Unlike other cryptocurrencies, these tokens derive their value from being pegged to another asset. This could be a fiat currency, such as dollars or euros, or a commodity, like gold or silver.
Stablecoins appeal to investors, because those pegs make them much less volatile than other cryptocurrencies. Bitcoin’s price has fluctuated between a low of $29,000 and an all-time high of almost $70,000 this year. Tether, the largest stablecoin by market capitalization, posted a low of $0.99 and a high of $1.01.
Many more cautious investors, including big-hitters like Warren Buffett, have criticized crypto because of its extreme
“In an ecosystem like cryptocurrencies, where volatility is typically high, this is an important property,” Paul Brody, principal and global blockchain leader at Ernst & Young, said. “If you want to take advantage of blockchain technology without exposing yourself to the volatility in crypto prices, this is the way to do it.”
Stablecoins are also commonly used in the world of decentralized finance, or DeFi – a crypto sector where developers can create sophisticated financial products without involving a central authority like a bank or a brokerage.
“We’ve got a lot of casinos here in the Wild West,” he said. “The poker chip is these stablecoins at the casino gaming tables.”
Tether has been a source of particular concern on account of the composition of its reserves. In February, the New York attorney general banned trading of that stablecoin after an investigation found out it had overstated its dollar backing. As with the rest of the crypto space, a lack of overall regulation means investors would have almost no regulatory protection if their stablecoin were to suddenly collapse, for example.
Insider compiled a list of the top three stablecoins by market value, looking into their governance and previous regulatory concerns.
Read More: a Guide to the Top 3 Stablecoins