What is a Stablecoin?

Stablecoins are a type of digital currency whose value is tied to a stable asset, usually a fiat currency such as the Australian Dollar. The assets act as a buffer and protect the value of the stablecoins from declining significantly.

Stablecoins are different to other cryptocurrencies because they are backed by real assets, while still offering the benefits of blockchain technology. They can only be issued (or minted) when the issuer receives or takes custody of the fiat equivalent of that stablecoin. This is known as “1:1 backing” and allows the stablecoin’s price to remain tied to the value they represent.

For example, if a user wishes to receive $100 worth of Australian Dollar backed stablecoin, he or she would pay the issuer 100 A$. In return, the issuer would mint 100 A$ of their stablecoin and send this to the user. Regardless of what he or she does with their stablecoin (spend it, save it, trade it or even lose it), the 100 A$ that backs it will remain in the custody of the issuer’s bank account until such a time that the user wishes to return to the fiat system. This process is also known as “burning” and results in the user taking the stablecoin out of circulation.