While Bitcoin’s price volatility leads to a lot of exciting headlines in the press, the reality is that some users also want to hold more stable digital assets. This is where stablecoins come into play.
A stablecoin is a specific type of cryptocurrency that specializes in price stability. These sorts of alternative crypto assets are pegged to some sort of real-world asset, such as the U.S. dollar, in an effort to remove volatility from the equation.
It should be noted that these stablecoins work very differently from traditional cryptocurrencies. Most importantly, stablecoins do not come with the same guarantees as something like Bitcoin when it comes to key features like censorship resistance. The stable tokens issued on various blockchains are usually backed by FIAT currency held in a bank account, which makes them much more easily controlled from a regulation perspective.
That said, stablecoins have been on the rise in 2020, and there will soon be more than $10 billion worth of them in existence. In fact, the transaction volume of stablecoins on Ethereum is greater than the transaction volume of the underlying ETH token.
What Are Stablecoins?
A stablecoin is any digital asset that’s value-pegged to a real-world asset. The most common versions are pegged to the US Dollar, which provides a stable value compared to volatile cryptocurrencies.
Stablecoins can also be backed by other currencies, however, such as the South Korean Won or the Japanese Yen. They can even be backed to commodities such as gold or silver.
Why Do People Use Stablecoins?
The main use case for stablecoins right now is as a tool for making cryptocurrency exchanges much more efficient. Specifically, stablecoins allow traders to hold fiat value within the cryptocurrency realm without having to move back and forth between their bank accounts and different exchanges.
In short, stablecoins help bridge the gap between the traditional financial world and the new cryptocurrency revolution. In addition to helping users be more efficient with the management of their FIAT currency on an exchange, stablecoins can also act as a sort of first step for people who are new to the concepts of cryptocurrency. With stablecoins, users are able to play around with a basic cryptocurrency wallet without having to worry about wild fluctuations in the underlying asset.
It should be noted that, while stablecoins are widely used on public blockchains today, it’s possible these fiat-backed assets will move to more controlled environments over time. After all, these crypto assets have ties to real-world assets that are easily accessible to financial compliance officers and regulators. This means that stablecoins have greater potential to become widely accepted and regulated sooner than other, more volatile cryptocurrencies.
How Do Stablecoins Work?
Stablecoins are value-pegged to real-world assets such as the US Dollar. This is commonly done by creating a reserve a real US dollars and then issuing matching dollars on a blockchain to represent those dollars digitally. This is done on a 1:1 basis with real-world dollars and digital dollars.
That’s not the only way to peg a digital asset to a real-world asset, however, as some issuers have done away with the real-world dollar altogether and instead derive their value from cryptocurrencies like Terra or Ethereum.
Top 7 Stablecoins
Stablecoins might not seem like the exciting part of the crypto (you won’t see huge gains by holding them) but they are actually a critical part of the industry.
Competition in the space has also heated up over recent years with Tether (USDT) dominance fading and the rise of USDC and even decentralized coins like TerraUSD (UST).
Here’s a look at the biggest stablecoins in the world:
1. Tether
Tether (USDT), which was originally called Realcoin, is the world’s oldest and largest stablecoin. It’s sort of like the Bitcoin equivalent of the stablecoin market.
Although there have been questions raised rather frequently in regards to whether or not the company behind Tether actually has the dollars to back up the Tether currently listed on many exchanges, Tether has managed to stay close to a $1.00 valuation throughout the majority of its existence.
In addition to the network effects that go along with being the first stablecoin on the market, Tether also benefits from operating in what the market perceives to be a legal grey area. Many people around the world use Tether when they want to gain access to a stable store of value because they think there is a lower chance that their funds will be seized or blocked. Then again, it should be noted that if Tether is indeed operating in a grey area of sorts, it could only be a matter of time until the platform is eventually closed down by financial regulators. This would be similar to what happened to the former gold E-Currency, known as E-Gold known as Liberty Reserve.
Although Tether was originally released on the Omni protocol on top of the Bitcoin blockchain, the stablecoin has since been issued on other blockchains such as Ethereum and Tron.
2. USD Coin
USD Coin (USDC) is the closest competition for Tether right now, and is gaining quickly. USDC is roughly 50% of the market cap of USDT at the time of writing and it just keeps capturing more of that market space.
USDC came out of a partnership between Coinbase and Circle. The dollars backing USDC are held in reserve at regulated financial institutions. In fact, regulated financial institutions are behind the actual issuance of the ERC-20 tokens onto the Ethereum blockchain too.
The US dollar reserves that are backing USDC are attested to by Grant Thorton LLP once per month.
As an example of how stablecoins like USDC are different from true cryptocurrencies like Bitcoin, it should be noted that the smart contract that controls USDC contains a backdoor for the financial entities behind the project. Through the use of this backdoor, USDC is able to be frozen on the blockchain. For some, this puts into question as to why a blockchain is necessary for these sorts of stablecoins in the first place.
USDC has shown a willingness to work with regulators that makes it standout from other stablecoins.
3. Binance USD
Next up we have Binance USD (or BUSD). This stablecoin was created through a partnership with Binance, which is the world’s largest cryptocurrency exchange by volume.
BUSD is backed by real U.S. dollars held in bank accounts that are FDIC insured. An accounting firm also attests to the backing of BUSD via these bank accounts on a monthly basis.
BUSD has quickly gained ground in the stablecoin market due to the fact that Binance in involved in the project.
4. TerraUSD (UST)
TerraUSD or UST is the youngest stablecoin on the market and it just might be the fastest growing one to boot.
UST is a little different than most stablecoins in that is is not backed by the US Dollar (or any fiat currency). Instead UST is an algorithmic stablecoin that derives its value from the Terra Luna (LUNA) cryptocurrency. To mint one UST, one LUNA must be burnt.
While UST is not backed by the US dollar, it is value-pegged to the US dollar so that it always keeps its stable $1 value.
Because of its unique minting mechanism, UST is considered the most decentralized stablecoin and many believe it has huge potential in DeFi. UST can also be staked on the Anchor Savings Protocol to generate significant yields.
It remains to be seen how regulators will approach UST (if at all) but for now it remains a favorite amongst decentralization maximalists.
5. Dai
As explained before, most stablecoins are backed by real fiat currency held in a bank account. However, this is not the case with Dai which pre-dates UST.
Dai uses a system of crypto-based collateral as the backing for the stablecoin, which is intended to track the value of the U.S. dollar. While the exact manner of how this works is rather complex, a simplified explanation is that users are able to place some Ether (or other ERC-20 tokens) in a smart contract as collateral for a loan denominated in Dai. Currently, the system requires 150% collateralization, so a user who has $150 worth of Ether would be able to create $100 worth of the Dai stablecoin.
The key reason for this added layer of complexity is to avoid the single point of centralization that comes along with traditional stablecoins backed by currency held in a bank account. However, it should be noted that the it remains unclear if this alternative form of stablecoin will be able to achieve its goal, and be viewed as a stablecoin in the eyes of regulators. We think crypto-collateralized stablecoins are pretty nifty and the concept and innovation behind maintaining it’s peg is a definite win. Only time will tell how the world adopts and reacts to crypto-collateralized stablecoins, such as Dai.
6. True USD
TrustToken is a prolific creator of stablecoins on the market, with five different offerings currently available for use. While TrueUSD (USD) is their most popular stablecoin, TrustToken also offers TrueGBP, TrueAUD, TrueCAD, and TrueHKD.
Although TUSD launched around the same time as USDC, it has not achieved anywhere near the same level of success. This token is also issued on the Ethereum blockchain, and partnered with Armanino, a top 25 accounting and consulting firm. This partnership will result in offering TrustToken’s stablecoin users with a real time dashboard view to track and the USD backing each and every TrueUSD. This makes TrustToken the first platform to offer real time reporting to its users and definitely scores some points in the transparency, compliance, and accessibility department.
7. Paxos Standard
Paxos has issued a number of different stablecoins on the Ethereum blockchain, but their most popular offering is known as Paxos Standard (PAX). In addition to fiat currency offerings, the company also offers a stablecoin that is pegged to the price of gold.
Much like USDC, the stablecoin offerings from Paxos come with monthly attestation reports.
According to Paxos, they decided to issue their stablecoins on Ethereum due to the high level of wallet support for ERC-20 tokens that is found in the cryptocurrency ecosystem, in addition to the benefits that come with being deployed on a public blockchain rather than a closed network.
It’s worth noting that Paxos also offers a gold version of its stablecoin (PAXG), which is pegged to gold, instead of fiat currency.
