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Bitcoin Stablecoins: What Are They and How Do They Work?
General Wallet Use
Bitcoin stablecoins are assets with a price that’s pegged to a price-stable asset and are used on Bitcoin powered networks and/or are backed in full or partially by Bitcoin.
Most stablecoins maintain their stable price by holders being able to redeem their stablecoins for the underlying assets and the market developing trust around the stablecoin’s ability to be redeemed on command. Some stablecoins have no collateral backing but haven’t had as much adoption in the market.
What is a Stablecoin?
A stablecoin is a crypto asset that pegs its price to the US dollar or something similar that is price-stable. Assets like the US Dollar usually have consistent purchasing power in everyday commerce, giving users a stable reference point for saving, spending, etc. Dollar pegged stablecoins have and continue to dominate the stablecoin market but there are other stablecoins that are pegged to the Euro and gold as well.
Types of Stablecoins
There are two types of stablecoins: collateral backed stablecoins and algorithmic stablecoins.
Collateral backed stablecoins can be subdivided into 3 different types: fiat, crypto, and commodity.
Fiat stablecoins, like USDC, are usually backed by bank deposits and government issued debt. Crypto-backed stablecoins, like DAI, are collateralized by some form of crypto asset like Bitcoin, Ethereum, and other crypto assets. Lastly, there are some stablecoins that are backed by a physical commodity like gold.
Algorithmic stablecoins do not have a collateral asset backing them and instead rely on smart contracts that interact in the market to maintain the desired price level. These are less common and have been fraught with risk. Collateral backed stablecoins are simpler and have had less issue maintaining their stability.
Does Bitcoin Have Stablecoins?
Yes, Bitcoin does have stablecoins and was the first network to host them. USDT, the first stablecoin, was launched on Bitcoin via the Omni network, a very early Bitcoin layer two network. However, overtime USDT and others were issued on other networks like Ethereum and most of the stablecoin activity that originated on Bitcoin moved outside of Bitcoin.
Recently, there has been a resurgence of stablecoins on Bitcoin. USDT has continued to be used in the Bitcoin ecosystem, mostly on a sidechain called Liquid, but recently Tether launched USDT on the lightning network via the Taro asset issuance protocol.
It has been and continues to be the most popular stablecoin on the Bitcoin network. But there are many new and exciting projects looking to reignite stablecoin issuance and usage on Bitcoin.
Bitcoin stablecoins projects to look out for include:
Digital wallets and Bitcoin Stablecoins
Bitcoin stablecoins can be used in digital wallets like any other crypto asset. However, not all digital wallets support the networks and protocols necessary to give users access to Bitcoin stablecoins.
For example, If you were trying to use USDA by Arkadiko, you would only be able to use it through wallets that support the Stacks network like Leather.
Bitcoin secured vs Bitcoin backed Stablecoins
Stablecoins that are not backed by bitcoin collateral but are used on a Bitcoin related network are said to be secured by Bitcoin. This means that the ability to double spend a stablecoin secured by bitcoin is not possible and their transaction histories are public, verifiable, and can’t be altered after they’ve been confirmed.
A Bitcoin backed stablecoin is a stablecoin that uses bitcoin as collateral to maintain its price target. This type of stablecoin could also be secured by Bitcoin the network but doesn’t have to be. It could be trading on other non-Bitcoin related networks.