A stablecoin is a cryptocurrency pegged to a reference asset, such as the U.S. dollar or Euro. Like a bank, stablecoin issuers hold onto vast amounts of deposits, as they take cash in return for issuing their coin onchain. This makes them similar in some ways to a traditional bank, but the two differ in some significant ways.
A bank lends most of your dollars out, insures the account, and pays a relatively small amount of interest on your holdings. On the other hand, a stablecoin issuer typically holds reserves against every stablecoin, keeps the interest for itself, and has no government backstop.
In this article, we’ll cover the core differences between stablecoins and traditional banking, as well as some of the conflicts that have arisen between the two industries.
What is a Stablecoin?
A stablecoin is a cryptocurrency built to maintain a reference value, such as one U.S. dollar. Traditional cryptocurrencies such as bitcoin are volatile as their price can rise or fall significantly in short periods of time. A stablecoin is meant to stay locked at a value of one dollar.
