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Top Stablecoins 2022

Top Stablecoins in 2022

When we think about cryptocurrencies, we automatically associate them to be volatile. This discourages average people to invest, transact or even think about using crypto assets, thereby hurting the adoption and growth of the entire industry.

This led to stablecoins which, as Investopedia puts it, offers the best of two worlds – that of a cryptocurrency and that of a more stable asset or reserve currency like US Dollars. In other words you get your decentralization, security and privacy features of a crypto and the stability of a fiat currency/commodity like gold. This article will help you understand what stablecoins are, the various advantages of using them and the most commonly used stablecoins available in the market today.

What is a Stablecoin and why do they exist?

Stablecoins are, as the name suggests, a type of crypto asset that depends on a more stable asset for its value. Generally, these stablecoins are pegged to the US Dollar where 1 stablecoin is backed by 1 USD. This is very helpful, as it helps in making transactions and payments over the blockchain network easy to understand for the masses without worrying about volatility.

One major difference between stablecoins and the traditional fiat currencies is that these stablecoins are not issued by a government. Most of them are rather issued by private companies except for a very few that are decentralized. Thus it becomes very important for the users/investors to understand which stablecoins they can rely on. In order to maintain the stablecoin to USD peg and keep the price stable, the project or the private company issuing the stablecoin has to hold an equivalent amount of base assets (in this case USD).

Types of Stablecoins

Based on how these assets are maintained as collaterals, stablecoins can be broadly classified as follows.

1. Stablecoins Backed by Fiat : As the name suggests, these stablecoins are backed by a traditional fiat currency (like USD or Euro). Examples include USDC by Circle, TrueUSD by TrueFi.

2. Stablecoins Backed by Cryptos : These stablecoins are backed by crypto as a result of which they are typically over collateralized by the issuing organization. This is done to ensure the stability in price is maintained, even if the underlying asset stays volatile due to market conditions. DAI issued by MakerDAO is a good example here.

3. Stablecoins Backed by Commodities : These coins use precious metals like gold in order to maintain stable price levels. PAXG by PAXOS is an example here.

4. Stablecoins Backed by Algorithms : Unlike the rest, these stablecoins are not issued by a centralized entity. As per the Fortune article , these stablecoins are backed by computer code. The price of these coins is based on algorithms that let traders create and destroy coins as needed to maintain their price. The result is supposed to be the same as their predecessor: a stable coin that is nearly always equal to the price of a fiat currency like the dollar. Example include UST by Terra which by the way ran into de-pegging issue as recently as in May 2022.

Most Popular Stablecoins by Market Capitalization (as of May 2022)

1. USDT (Tether)

Although BitUSD was the first ever stablecoin to be created, the Tether foundation was the first in creating a successful and most widely used stablecoin. As per their website,Tether tokens are “100% backed by reserves that include traditional currency and cash equivalents, and may include other assets and receivables from loans made by Tether to third parties”. Launched in 2014, Tether roughly commands around 45% of the market share among all stablecoins in the market as of April 2022.

2. USDC (USD Coin) 

USD Coin i.e USDC has emerged as the biggest challenger to Tether’s market supremacy. USDC is founded and largely managed by Circle. USDC’s current market share is roughly around 28%, making it the second most widely used stablecoin.

3. BUSD (Binance USD)

BUSD or Binance USD was created jointly by Binance and PAXOS. Binance, being the largest crypto exchange across the globe with a large user base made it easier to adopt this stablecoin over the years. In terms of market cap, BUSD ranks fourth and roughly has a market share of around 10%.

4. DAI

DAI is managed by MakerDAO and is positioned as the world’s first unbiased cryptocurrency. It is soft pegged to the dollar – all the DAIs in circulation are generated from the Maker Vaults, backed by a surplus of collateral crypto assets that are deposited by its users. Roughly 5% of the total stablecoin market share is held by DAI.

How Will Stablecoins Impact Society?

The Web 3.0 world is created on the foundations of a decentralized money system. Stablecoins in general have been crucial in terms of introducing users that have been more familiar with traditional financial systems by acting as a bridge between fiat money and cryptocurrencies.

Most common advantages include :

1. Transfer money cheaply across world : Sending thousands of dollars of money at a transfer fee of just less than a dollar, is now possible thanks to the power of internet money through blockchain in Web 3.0 which is also known as the internet of value.

2. Earning passive income : Traditional banks offer low yields on bank deposits when compared to yield farms offered by cryptocurrency exchanges and DeFi (Decentralized Finance) protocols. Since stablecoins have been traditionally used to convert fiat into crypto and vice versa, there is a huge market and demand for them. Cashing on that demand, crypto lenders and exchanges offer high APYs to those users who are willing to lend their stablecoins for a certain period of time.

3. Trading : Stablecoins make trading in crypto pairs more simple and easy to understand since they are pegged to stable currencies.

4. Lend and Borrow from across the world : Lending and borrowing assets through various DeFi protocols makes accessibility to financial services free from geographical restrictions and prejudice.

5. Speed of transaction : Within seconds, billions of dollars in value is efficiently sent across continents vastly reducing time and effort.

Conclusion

As time progresses, an increase in crypto adoption will give rise to more innovative use cases of stablecoins like this for instance. Onboarding the next 1 billion users on Web 3.0 will be possible only through simplifying its complicated tools and processes. Stablecoins provide the perfect foundation for the process that fuels this change.

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Disclaimers : Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum Foundation.

About the Author : Yash Nair is a product manager on the weekdays and a cinephile over the weekends. He is curiously exploring Web 3.0 and all things crypto. You can follow him on Twitter

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