Stablecoin

A stablecoin is a specific type of cryptocurrency whose value is pegged 1:1 to a collateral asset. Stablecoins can be collateralised to different types of assets:

• Fiat stablecoins: These stablecoins are backed by a reserve of fiat currency (e.g., USD, EUR, or JPY) held in a bank account. Each stablecoin issued is supposed to represent a corresponding amount of the reserve currency.
• Crypto stablecoins: Crypto stablecoins are backed by a reserve of other cryptocurrencies. They use a smart contract system to maintain price stability by adjusting the supply of stablecoins based on changes in the value of the collateral.
• Algorithmic stablecoins: Algorithmic stablecoins do not rely on collateral assets but use algorithmic mechanisms to control their supply and demand in a way that aims to stabilise their price. These stablecoins are often referred to as "crypto-native" because they don't require traditional assets as collateral.
• Commodity stablecoins: These stablecoins are backed by physical assets such as precious metals (e.g., gold) or commodities (e.g., oil). The value of the stablecoin is tied to the value of the underlying asset.

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Unlike traditional cryptocurrencies like Bitcoin or Ethereum, which can have highly volatile prices, stablecoins are pegged to a collateral asset. It aims to minimise price fluctuations by following the price of the collateral, making them more suitable for use as a medium of exchange, a unit of account, or a store of value.

Yes, USDT is a stablecoin backed by the US Dollar. This means that for every USDT in circulation, there should be 1 USD in reserve.

Stablecoins can serve various purposes within the cryptocurrency ecosystem:

• Price stability: They provide a stable unit of account and a medium of exchange within the volatile cryptocurrency market, allowing users to avoid the extreme price fluctuations associated with other cryptocurrencies. They could also help people to protect their money against currency fluctuations.
• Facilitating trading: Traders often use stablecoins as a safe haven to park their funds during periods of market volatility, allowing them to quickly re-enter the market when opportunities arise.
• Cross-border transactions: Like common cryptocurrencies, stablecoins simplify cross-border transactions by reducing the time and cost associated with currency conversion and international wire transfers.
• Decentralised finance (DeFi): Stablecoins are a fundamental component of the DeFi ecosystem, where they are used for lending, borrowing, yield farming, and liquidity provision.
• Remittances: Stablecoins can be used to send remittances across borders quickly and cost-effectively, especially in regions with limited access to traditional banking services.
• Store of value: Some users prefer stablecoins as a store of value, particularly when they want to hold cryptocurrencies but seek stability in their value.

Tether USD (USDT) is one of the most used stablecoins. Other popular stablecoins are USD Coin (USDC), Binance USD (BUSD), or Dai, for instance.

Tether USD (USDT) is the world’s largest stablecoin and third-largest cryptocurrency by market capitalisation (Coinmarketcap, February 2024).

To redeem stablecoins for USD, you typically need to follow these steps:

• Select a platform: Choose a reputable platform or exchange that supports the redemption of stablecoins for USD. Ensure that the platform is trustworthy, has a good reputation, and offers the stablecoin you want to redeem.
• Setup your account: Create an account on the chosen platform if you haven't already done so. Complete the necessary identity verification procedures, which may include providing personal information and verifying your identity to comply with regulatory requirements.
• Deposit stablecoins: Deposit the stablecoins you want to redeem into your account on the platform. This typically involves transferring the stablecoins from your wallet or another exchange to your account on the redemption platform.
• Initiate withdrawal: Once the stablecoins are deposited into your account, navigate to the withdrawal section of the platform. Follow the instructions provided to initiate the withdrawal process.
• Confirm the transaction: Review the details of your withdrawal request and confirm the transaction. The platform will process your request, convert the stablecoins into USD at the current exchange rate, and initiate the transfer of USD to your designated bank account.
• Receive USD: Once the process is complete and the transaction is confirmed, you will receive USD funds in your bank account. The time it takes to receive the funds may vary depending on the platform's processing times and your bank's policies.

By following these steps, you can redeem stablecoins for USD and access fiat currency funds for various purposes, such as withdrawing cash, making purchases, or transferring funds to other accounts.

Xapo Bank makes this process even simpler, all you need is the Xapo Bank app. You can redeem stablecoins for USD at Xapo Bank. Indeed, we allow our members to deposit USDC and USDT directly into their Xapo Bank USD account. The coins are automatically converted to USD the moment it is received, giving you immediate access to the USD equivalent in your Xapo Bank account.

‍Learn more about our stablecoin rails.