Cryptocurrencies known as stable coins have value anchored to another coin, good, or financial instrument. The extreme volatility of the most widely used cryptocurrencies, such as Bitcoin (BTC), has rendered such investments less suited for widespread usage in transactions. Stablecoins aims to offer an alternative to this situation.
Understanding Stablecoins
Even while Bitcoin is still the most widely used cryptocurrency, its price or exchange rate is notoriously unstable. For instance, the price of Bitcoin increased from an intraday low of just over $4,000 in March 2020 to approximately $65,000 in April 2021 before falling by almost 50% over the next two months. Intraday swings can also be erratic; the value of the cryptocurrency frequently changes by more than 10% over a few hours.
This volatility can be excellent for traders, but for buyers and sellers, it makes simple transactions like purchases into risky speculation. Investors in cryptocurrencies who intend to retain them for long-term growth don’t want to make a name for themselves by using 10,000 Bitcoins to buy two pizzas. Most businesses do not want to incur a loss, though, if the value of a cryptocurrency declines after they have been paid in it.
A currency that is not legal tender must be reasonably stable to function as a medium of exchange, guaranteeing those who accept it that it will maintain purchasing power soon. Even 1% daily changes in regular fiat currencies are uncommon in forex trading. Stablecoins, as their name suggests, promise to fix this issue by steadily maintaining the cryptocurrency’s value in many different ways.
Why are Stablecoins Important?
Dollar-denominated assets back the USDC stable coin in segregated accounts with US-regulated financial institutions. Independent accountants testify to such accounts.
USDC operates on Ethereum, like many stable coins. Stablecoins lack the volatility of non-pegged cryptocurrencies while retaining some of their best features.
- Stablecoins are open worldwide and accessible 24/7.
- Fast, economic, secure transmission
- Programmable and Internet-native
What Can You Do with Stablecoins?
- Minimise volatility.
Bitcoin and Ether’s value swing by the minute. An asset tied to a stable currency might provide buyers and sellers confidence that their tokens won’t rise or sink unpredictably. - Trade or save assets.
Stablecoins are straightforward to transfer without a bank account. Stablecoins may be readily shipped worldwide, including to countries where the U.S. dollar is hard to get or the local currency is unstable. - Earn interest
Stablecoin investments can yield interest (usually greater than a bank) easily. - Transfer money cheaply.
People have sent $1 million in USDC for less than $1. - Globalise.
Stablecoins like USDC are fast and have cheap transaction costs for moving money globally.
Types of Stablecoins
The underlying asset differentiates stablecoins. Types include:
- Commodity Backed Stablecoins
Stablecoins backed by gold or property are commodity-backed. Most stablecoins are collateralized by gold, but some employ diversified baskets.
- Fiat Backed Stablecoins
Stablecoins backed by fiat currencies like the Chinese yuan preserve a reserve as collateral. Other fiat currencies include platinum, silver, grain, and oil.
Dollar reserves back most fiat-backed stablecoins. A scheduled audit of the currency’s independent custodian ensures compliance.
- Crypto-Backed Stablecoins
Crypto supports other cryptos. Crypto-backed stablecoins are similar. The currency will be overcollateralized to mitigate the higher volatility of crypto-backed stablecoins.
The stablecoin will have a lower supply versus the reserve than fiat currencies. A crypto-backed stablecoin may issue $500 worth of coins for every $2,000 reserve instead of a 1-to-1 ratio.
- Seigniorage Style Stablecoins
Seigniorage is supported by an algorithm or process, not a currency. In a whitepaper, cryptographer Robert Sams proposes a Federal Reserve token (fed coin) that may be backed by seigniorage. Decentralised smart contracts might “back” these coins.
Top Stablecoins
Stablecoins vary. As the number of stablecoins grows, it’s important to know the best ones. Best stablecoins now:
- Tether / Tether (USDT)
Tether is the most famous and most circulating stablecoin in the crypto space, its value is locked (pegged) 1:1 with the U.S. dollar; and its issuing company claims to be backed by gold, currency and cash equivalents. Tether is known for its security and crypto-to-fiat interoperability.
2. USD Coin USD Coin (USDC)
USD Coin, also known as USDC, is another digital currency locked in USD. USDC claims that its reserve assets are kept in separate accounts with U.S.-regulated financial institutions.
USD Coin is managed by Centre, a consortium co-founded by cryptocurrency exchange Coinbase and fintech company Circle.
3. Binance USD (BUSD)
Binance USD or BUSD, is also a stablecoin pegged 1:1 with the US dollar, issued by Binance Exchange and hosted by Paxos. Like other stablecoins, BUSD also claims that every BUSD circulating in the market has a corresponding USD 1 asset stored in the bank.
4. DAI
DAI is an Ethereum-based stablecoin whose issuance and development are governed by the Maker Protocol and the MakerDAO Decentralized Autonomous Organization.
The price of DAI is soft-pegged to the U.S. dollar, collateralized by a mix of other cryptocurrencies deposited into the smart contract vault each time a new DAI is minted. It is important to distinguish between multi-collateral DAI and single-collateral DAI (SAI), which is an early version and can only be collateralized by a single cryptocurrency;
MakerDAO is a decentralized autonomous organization, a company that runs itself in a decentralized manner by using smart contracts.
5. True USD / TrueUSD (TUSD)
Real USD is a currency 100% backed by USD and one of the most liquid stablecoins. Compared to fiat currency wire transfers, transaction fees are lower and interest rates are higher for storing balances. TrustToken, the creator of True USD, has also issued stablecoins pegged to other fiat currencies, including TrueAUD, TrueGBP, and TrueHKD.
6. USDP / Pax Dollar – formerly known as PAX (USDP)
On August 24, 2021, Paxos Standard (PAX) announced its official name change to Pax Dollar (USDP). USDP, known as the first regulated cryptocurrency, is convertible one-to-one into U.S. dollars and holds 100% cash and cash equivalents as reserves. For this reason, 1 USDP always remains one US dollar.
Trade or Invest in Cryptocurrency
Every advanced crypto trading platform offers stablecoins and unpegged coins. Whether you’re a trader or long-term investor, this tool can help you preserve capital and stabilise portfolio value. Here are some top cryptocurrency exchanges:
Advantages/disadvantages
Stablecoins have pros and cons like other crypto.
Advantages
- Borderless. Stablecoins can flow across borders like other cryptocurrencies.
- Rapidity. Blockchains speed up financial transactions. Stablecoin transactions don’t need a 3rd party to validate the transfer, hence no one pays fees.
- Transparency. Unlike conventional cash, stablecoin transactions are recorded on a public ledger.
Disadvantages
- Centralization. Stablecoins are owned by centralised entities, unlike some cryptocurrencies. Even DAI, a decentralised stablecoin, has been criticised for its centralization.
- Third-party audits required. Stablecoins must be audited by 3rd parties, which may conflict with a decentralised, trustless, or pseudonymous experience.
- Deflation. Unpegged cryptocurrencies offer higher ROIs than stablecoins.
Using Stability to Create Profitability
Most crypto investors think that stablecoins are a fantastic strategy to diversify and safeguard your holdings. If you trade volatile alt coins, you can utilise the stablecoin to sell dropping assets and buy at a better price.
Will stablecoin disrupt crypto? The stablecoin and unpegged cryptocurrencies serve different purposes, thus a takeover is improbable.
Stablecoins may be used in the digital transformation of money. Stablecoins can give liquidity to exchange markets, serve as a means of exchange for risk-averse investors, and secure digital assets.
