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 the decentralization, security and privacy features of 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 Algorithm
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 stablecoin 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%.
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.
TerraUSD, also known as UST, is a digital currency offered by Terra that is designed to track the value of 1 USD. This means that it is 1 to 1 pegged to the value of the US dollar. At the moment, TerraUSD is the 31st most valuable cryptocurrency by market capitalization, with a market cap of $16.70 billion.
The primary use case for TerraUSD is to earn returns through the Luna staking and governance reward token system, which is a system set up by Terra. Additionally, TerraUSD can also be used to earn returns through arbitrage opportunities, which is the practice of taking advantage of price differences between different markets or exchanges.
Overall, TerraUSD is a stablecoin that aims to provide a stable and reliable option for digital transactions and investments.
6. True USD
TrueUSD is a type of stablecoin that is completely collateralized, meaning it is backed by a reserve of assets, in this case, the US dollar. It is considered to be a highly secure and reliable option, as it is a verified ERC-20 token, which is a standard for digital assets on the Ethereum blockchain. TrueUSD maintains a 1:1 ratio with the US dollar, just like most other popular stablecoins.
Additionally, it is the first and foremost cryptocurrency developed on the TrustToken platform. This platform is designed to provide a secure and transparent way to create and trade tokenized assets. TrueUSD is one of the most widely used stablecoin among the investors, traders and merchants for its reliability and stability.
7. Paxos Standard
Paxos Standard is a stablecoin that operates on the Ethereum network. It is designed to make cross-border transactions more efficient by eliminating fees. It aims to create “a future where digital assets, securities, and commodities can be transferred seamlessly and globally”.
One of the primary benefits of Paxos Standard is that there is no fee for conversion or transactions, making it one of the most liquid stablecoins in the market. It is also widely available on all exchanges and the 1:1 stability mechanism reduces the chances of high volatility.
However, it does have a drawback in that it requires third-party auditing for verifying the reserve of assets that back the stablecoin.
8. Digital Gold Token (DGX)
Digital Gold Token, also known as DGX, is a stablecoin that is backed by physical gold. This stablecoin is built on the Ethereum blockchain, making it accessible and easily transferable to other Ethereum-based platforms and decentralized applications. This stablecoin is particularly appealing for individuals who prefer to invest in gold as a store of value due to its historical stability and low correlation to other assets.
Digital Gold Token is a perfect alternative for those who believe in the stability of gold and want to have the benefits of digital assets, as it offers a way to use gold as a store of value in the digital world, which opens up new opportunities for investment and transfer of value.
9. Neutrino USD (USDN)
Neutrino USD is a stablecoin that is built on the principle of crypto-collateralization, which means it is backed by other cryptocurrencies rather than fiat currency. This stablecoin is algorithmically managed, meaning that it is controlled by a set of rules and procedures that are defined by smart contracts.
One of the key features of Neutrino USD is its transparency, as all of its operations like issuance, staking, collateralization, and reward payouts are conducted in an open and transparent manner.
Neutrino USD is a good option for those who want a stablecoin that is backed by other cryptocurrencies and is transparent and secure.
TRIBE is a stablecoin that is built on the Ethereum blockchain and is designed to provide governance to the Fei protocols, which are a set of decentralized financial protocols that are built on the Ethereum blockchain. This stablecoin also offers a separate decentralized stablecoin called FEI, which is designed to be a stable store of value and can be used for a wide range of financial transactions.
TRIBE is a good option for those who are looking for a stablecoin that is built on the Ethereum blockchain and provides governance to the Fei protocols, it is also suitable for those who are interested in a decentralized stablecoin ecosystem that is community-driven and offers a stable store of value.
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.
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.
Frequently Asked Questions (FAQs)
1. Are Stable Cryptocurrencies called “Stablecoins”?
Yes, stablecoins and stable cryptocurrencies are the same. They are created to minimize the volatility that is commonly associated with other cryptocurrencies. The most popular stablecoins in the top 20 by market cap are known for their stability and tend to experience little to no fluctuations in their value.
2. What is a Stable Cryptocurrency?
A stablecoin is a type of cryptocurrency that maintains a stable value, often connected to a specific asset like a fiat currency or other cryptocurrency. The most popular stablecoins are pegged to the value of the US dollar and have a stable value, with little to no fluctuations.
3. Is Litecoin a Stablecoin?
Litecoin is not a stablecoin, it is a digital asset that works similarly to Bitcoin. Litecoin was created as an alternative to Bitcoin and has its own unique features. Unlike stablecoin which are pegged to a specific asset or currency and maintain a stable value, Litecoin is a decentralized cryptocurrency that fluctuates in value with the market.
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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