Stablecoins offer many benefits that other cryptocurrencies provide, with one essential difference – they are stable, hence the name.
In a market where the price of the assets one holds is swinging violently, the option to ‘store’ funds’ value in a way that excludes volatility is quite essential. This option is not limited to crypto traders only, but also expands retailers to accept cryptocurrencies without the need to worry about price fluctuations.
In most cases, most stablecoins are pegged to a widely used FIAT currencies such as the US Dollar or the Euro. Some are pegged to commodities, such as Gold.
For many cryptocurrency traders, they serve as a lifeboat to escape to when they want to hedge their crypto portfolio without cashing out to FIAT. This is very effective especially during bear markets or to keep profit in FIAT value. After all, the world’s day-to-day currency is still FIAT and not Bitcoin.
Stablecoins are also likely to become a critical component in decentralized finance (DeFi). DeFi presents an alternative to the existing financial systems with one which is built on public blockchains.
This notion has recently become popular and there was a severe increase in the projects developing exciting products, such as peer to peer loans. If DeFi is to grow, stablecoins will undoubtedly play a vital role because people would need a volatility-free means of transacting with each other, without losing the benefits of cryptocurrencies.
Stablecoins received mass-media attention lately, as major companies and even financial institutions dug deeper. Word leading bank institutions are examining the creation of their own digital stablecoins. One example is JP Morgan’s JPM Coin.
And of course – Facebook. During the second half of 2019, the tech giant announced on its revolutionary project – Libra, as the initiative is touted, is supposed to be pegged to a basket of fiat currencies and some more assets.
But it doesn’t stop there. Even governments and central banks began contemplating the idea of stablecoins. The former Chairman of the US Commodity Futures Trading Commission (CFTC) headed an initiative to create “digital Dollar.” A draft document from the European Union hinted that they are also considering the creation of a new stablecoin.
In a rather broad categorization, there are three identifiable types of stablecoins.
These are backed 1:1 by fiat currencies, which are stored in bank accounts. Examples: Tether (USDT), USD Coin (USDC), Gemini USD (GUSD), and so forth. They are centralized because they are launched and governed by a central organization, which could be either a company, a bank or even a government.
These are a relatively new type of stablecoins which don’t have a central operator but are governed by a consensus of the users who take part in the network.
An example here is Maker DAO’s stablecoin – DAI. Users can lock up a certain amount of cryptocurrencies, such as Ethers, as collateral for borrowing DAI, which is pegged to the US Dollar.
These are still relatively new. They don’t have any collateral backing their system, and they rely on algorithms to get their price in order to remain stable.
Even though there are quite a few different stablecoins in existence, some of them stand out in terms of usage and overall volume. The following pie presents the top stablecoins by market share, as of the beginning of 2020.
Since its creation in 2014, Tether (USDT) is undoubtedly the predominant market leader when it comes to stablecoins. Tether converts cash into digital currency, anchoring its price to the US Dollar 1:1. According to the official website, “every tether is always 100% backed by the company’s reserves.” Those reserves include traditional fiat currencies and cash equivalents.
It’s worth noting that there are several networks that USDT is being minted on. At the time of this writing, these include Omni, Ethereum, Tron, EOS, and Liquid.
USDT is operated by Tether Limited, which is closely associated with iFinex, which is the parent company of the popular exchange Bitfinex.
This fact has brought a lot of controversy to the stablecoin. In fact, in 2017, the CFTC sent subpoena to both Tether and Bitfinex, with the possible reasons being the lack of security audits, as well as alleged manipulation of the price of Bitcoin.
USD Coin (USDC) is a stablecoin launched by the US crypto exchange, Coinbase, together with trading desk and OTC – Circle. It is designed to be pegged to the USD 1:1. Fun fact, Coinbase rewards its customers for holding the USDC on their exchange account.
According to the official website of Coinbase, each USDC is backed by one US Dollar, which is held on bank accounts.
The cryptocurrency is powered by Ethereum blockchain, as an ERC-20 token. This means that users can store it on compatible wallets, such as MyEtherWallet and MyCrypto.
Similar to all other stablecoins, PAX can be moved instantaneously, without any regards of time or location. Like the former, PAX is also pegged 1:1 to the US dollar and based on Ethereum’s ERC-20 blockchain.
Paxos Trust Company, PAX issuer, is also the company that operates the Paxos exchange, along with custody services and safeguarding physical and digital assets as a regulated trust. The company was founded back in 2012 and it started with the launch of the itBit exchange in Singapore. Later in 2015, Paxos got its New York State Department of Financial Services (NYDFS) trust charter.
Paxos claims that the dollars, which back each PAX in regulation, are held in segregated accounts, which are FDIC-insured and domiciled in US banks. According to the official website, PAX is listed on over 100 exchanges.
TUSD is another ERC-20 based stablecoin, which is also pegged to the US Dollar 1:1. As per the official website, TUSD is supported by more than 70 exchanges around the world, including the major ones.
TrueUSD’s issuer also issued other stablecoins pegged to other coins: those include TrueGBP, TrueAUD, TrueCAD, and TrueHKD.
DAI is unlike the rest of the above-mentioned stablecoins on this list. While its value is pegged to the US Dollar 1:1, the main difference is that it is decentralized.
DAI is not governed or issued by a central authority or, as in most of the cases here, by a centralized company. Instead, DAI is governed by a decentralized community of MKR token holders. These holders are in control of the Maker Protocol, which is the smart contract behind the DAI stablecoin.
This comes with a lot of benefits. For once, it takes away the worry that the company controls the supply of the stablecoin. It’s also immutable, censorship-resistant, and entirely transparent by design.
Moreover, Maker is working in one of the emerging fields when it comes to cryptocurrencies and blockchain-based technology: decentralized finance (DeFi).
The main threat of decentralized stablecoins, such as DAI, is hacking to the smart contract. In such a scenario, there is no physical backup of the DAIs.
The Gemini Dollar (GUSD) is touted as the first-ever regulated stablecoin. It’s issued by the Gemini Trust Company, which is owned by Tyler and Cameron Winklevoss.
The famous twins are also the owners of the Gemini cryptocurrency exchange, which operates as a qualified custodian under New York Banking Law and is also licensed by the State of New York.
The ERC-20 based GUSD cryptocurrency pegged to the US Dollar 1:1 sees its backing fiat currency held at State Street Bank and Trust Company.
According to the official website, the USD deposit balance is examined every month by a registered public accounting firm in order to guarantee the pegging. All the reports are published and available online.
Price: $1
Launch Date: September 2018
Launched by: Gemini Trust Company LLC
Blockchain: Ethereum
For more info: GUSD Website
Binance USD (BUSD) is the stablecoin that resulted from a partnership between the leading crypto exchange and Paxos. It has received the approval of the New York State Department of Financial Services (NYDFS), and it was made available for trading since 2019.
Price: $1
Launch Date: September 2019
Launched by: Binance, Paxos
Blockchain: Ethereum
For more info: GUSD Website
Stablecoins come with a range of different benefits because of their digital, programmable, and blockchain-based nature. Apart from them being safe because of their peg and stability, some of the other advantages include:
Just like Bitcoin, stablecoins can also be sent via the internet with no regard for countries, banks, or any types of intermediaries. The transactions are direct and immutable. They can’t be blocked or censored because they are carried out on the blockchain.
The lack of intermediaries and the peer-to-peer nature of stablecoins also make transactions a lot cheaper than traditional transactions of funds.
Unlike regular bank transfers or credit card payments, which immediately charge you a certain fee and commissions, transactions carried out with stablecoins incur a minimal cost.
Blockchain-based transactions are a lot quicker compared to traditional ones. The reasons for this are for verifications and anti-money laundering (AML) processes, but perhaps an important one is that there are no intermediaries and waiting periods. As soon as the transaction is initiated, it usually takes minutes for the funds to hit the account of the receiver.
Stablecoin transactions are carried out on public blockchains. Users can monitor each transaction, regardless of whether they initiated it or not. This is impossible with traditional payments, and it provides the much-needed transparency that a lot of people are looking for.
Stablecoins, as the name suggests, aren’t volatile. This is a significant benefit for those who look for safe alternatives to Bitcoin and other cryptocurrencies when sending and receiving funds.
Of course, stablecoins, in their current shape and form, come with certain disadvantages as well.
The majority of the stablecoins pertain to an individual organization. This means that the stablecoin, though decentralized on its own, is owned by a single entity that controls its issuance and minted supply.
This is entirely counter-indicative of the very nature of cryptocurrencies because it basically creates another form of authority, similar to what banks currently have. However, not all the stablecoins are centralized (DAI, as mentioned above).
One of the main ideas behind cryptocurrencies is to handle the challenges that traditional financial markets have. Stablecoins are usually pegged to fiat currencies, making their value depends on the current condition of the global economy and subject to inflation, which FIAT currencies have.
The lack of regulation within the field is something that all cryptocurrencies pertain to. Stablecoins are no exception. As such, there’s a long way for them to grow into what they are intended to and to function as a means of transacting.
There’s no doubt that stable coins should have a place in the crypto space. They provide a bridge between the real-world of fiat and crypto, as well as a storage place for investors and traders to temporarily escape the massive volatility of the crypto markets.
Yet one has to be concerned that crypto users are too reliant on stable coins and that their absence or potentially a crash of Tether or any other leading stablecoin could lead to far more damage to the crypto space than any hacking incident or FUD story could ever inflict.
Ultimately, if stablecoins are to remain a focal point within the crypto space, then the best way to operate them is under a regulatory compliant framework that still allows a significant degree of decentralization and censorship resistance.
