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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 one’s assets swings violently, the option to ‘store’ funds’ value in a way that excludes volatility is essential. This option is not limited to crypto traders only but also expands retailers’ ability to accept cryptocurrencies without the need to worry about price fluctuations.
In most cases, stablecoins are pegged to widely used FIAT currencies such as the US Dollar or the Euro. Some are pegged to commodities such as Gold.
What Are Stablecoins Used For?
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 at a 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 has been a severe increase in the number of projects developing exciting products, such as peer-to-peer loans. If DeFi is to grow, stablecoins will undoubtedly play a vital role because people will need a volatility-free means of transacting with each other without losing the benefits of cryptocurrencies.
Commercial Stablecoins: From JPM Coin To Libra
Stablecoins have received mass media attention lately as major companies and even financial institutions dug deeper. 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 its revolutionary project—Libra, as the initiative is touted, is supposed to be pegged to a basket of fiat currencies and some other 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 a “digital Dollar.” A draft document from the European Union hinted that they are also considering the creation of a new stablecoin.
The Three Types of Stable Coins
In a rather broad categorization, there are three identifiable types of stablecoins.
Centralized Stablecoins Backed By FIAT
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.
Decentralized Stablecoins Backed By Crypto
These are a relatively new type of stablecoins that don’t have a central operator but are governed by a consensus of the network’s users.
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.
Decentralized Algorithmic Stablecoins
These are still relatively new. They don’t have any collateral backing their system, and they rely on algorithms to keep their prices stable.
The Most Popular Stablecoins By Market-Cap
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 cap as of July 2024.
Tether (USDT)
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. To safely store your USDT, consider using one of the best USDT wallets.
It’s worth noting that USDT is being minted on several networks. At the time of this writing, these include Ethereum, EOS, TRON, Algorand, and OMG network.
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 caused a lot of controversy for the stablecoin. In fact, in 2017, the CFTC sent a subpoena to both Tether and Bitfinex, with the possible reasons being the lack of security audits and the alleged manipulation of the price of Bitcoin.
Market Cap: $0
Launched by: Tether Limited, British Virgin Islands
Blockchain: Omni, Ethereum, Tron, EOS, Liquid
For more info, Tether Website
USD Coin (USDC)
USD Coin (USDC) is a stablecoin launched by the US crypto exchange Coinbase, together with its trading desk and OTC Circle. It is designed to be pegged to the USD 1:1. Fun fact: Coinbase rewards its customers for holding USDC on their exchange accounts.
According to Coinbase’s official website, each USDC is backed by one US Dollar, which is held in bank accounts.
The cryptocurrency is an ERC-20 token powered by the Ethereum blockchain. Users can store it on compatible wallets, such as MyEtherWallet and MyCrypto.
Market Cap: $0
Launched by: Coinbase, Circle
Blockchain: Ethereum
For more info: USDC Website
Paxos Standard (PAX)
Similar to all other stablecoins, PAX can be moved instantaneously without any regard for 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, operates the Paxos exchange and custody services and safeguards physical and digital assets as a regulated trust. The company was founded in 2012 and 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 that 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.
Market Cap: $0
Launched by: Paxos Trust Company
Blockchain: Ethereum
For more info: PAX Website
True USD (TUSD)
TUSD is another ERC-20-based stablecoin that is also pegged to the US Dollar 1:1. According to its official website, TUSD is supported by more than 70 exchanges worldwide, including the major ones.
TrueUSD’s issuer also issued other stablecoins pegged to other coins, including TrueGBP, TrueAUD, TrueCAD, and TrueHKD.
Market Cap: $0
Launched by: TrueCoin LLC
Blockchain: Ethereum
For more info: TUSD Website
Dai (DAI)
DAI is unlike the other 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, it is governed by a decentralized community of MKR token holders. These holders control the Maker Protocol, the smart contract behind the DAI stablecoin.
This has many benefits. For one thing, it eliminates 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 into the smart contract. In such a scenario, there is no physical backup of the DAIs.
Market Cap: $0
Launched by: Maker Ecosystem Growth Holdings, Inc.
Blockchain: Ethereum
For more info: Maker DAO Website
Gemini Dollar (GUSD)
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, has its backing fiat currency held at State Street Bank and Trust Company.
According to the official website, a registered public accounting firm examines the USD deposit balance every month 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)
Binance USD (BUSD) is a 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 has been available for trading since 2019.
Price: $1
Launch Date: September 2019
Launched by: Binance, Paxos
Blockchain: Ethereum
For more info: GUSD Website
Why Stablecoins Will Change The World?
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:
Borderless Payments
Just like Bitcoin, stablecoins can also be sent via the Internet without regard for countries, banks, or intermediaries. The transactions are direct and immutable, and because they are carried out on the blockchain, they can’t be blocked or censored.
Low Fees
The lack of intermediaries and the peer-to-peer nature of stablecoins also make transactions much cheaper than traditional fund transfers.
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.
Faster Transactions
Blockchain-based transactions are much quicker than traditional ones. The reasons for this are 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 receiver’s account.
Transparency
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.
No Volatility
As the name suggests, stablecoins 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.
Stablecoins: Some Cons, Indeed
Of course, stablecoins, in their current shape and form, come with certain disadvantages as well.
Centralization
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).
Depend On Traditional Financial Markets
One of the main ideas behind cryptocurrencies is to handle the challenges that traditional financial markets face. Stablecoins are usually pegged to fiat currencies, so their value depends on the current condition of the global economy and is subject to inflation, which FIAT currencies have.
Unregulated
All cryptocurrencies pertain to the lack of regulation within the field, and stablecoins are no exception. As such, it’s a long way for them to grow into what they are intended to be and function as a means of transacting.
Conclusion
There’s no doubt that stablecoins 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 escape the massive volatility of the crypto markets temporarily.
Yet one has to be concerned that crypto users are too reliant on stablecoins 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, the best way to operate them is under a regulatory-compliant framework that still allows a significant degree of decentralization and censorship resistance.
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