What are Stablecoins? Most cryptocurrencies are volatile as we often see a 10% move for the price of Bitcoin or Ethereum on any given day. To better facilitate practical transactions for good & services and store of USD value, resulting in the launch several stablecoin projects.
A stablecoin is a cryptocurrency with a design that helps minimize price volatility by being pegged to another asset such as the U.S. dollar or gold. However, most asset-backed stablecoins are considered to be centralized as the collateral (underlying asset) is controlled and managed by the issuer of the coin (centralized body).
There are three main advantages of using Stablecoins:
- We use Stablecoins in smart contracts; e.g. decentralized fundraising and decentralized financial products such as consumer loans.
- Stablecoins act as a bridge for quicker and less costly international money transfers compared to fiat.
- Various exchanges provide crypto to stablecoin pairs which allow traders to adjust their exposure.
We can categorize Stablecoins into fiat-backed and crypto-backed. The main difference is while the collateralization of fiat-backed stablecoins happens off-chain, the collateralization of crypto-backed stablecoins is done on the blockchain via smart contract. Therefore more transparent and decentralized.
Fiat-backed Stablecoins
Tether (USDT)
USDT is a stablecoin claiming that each token’s support comes from one US Dollar. It was initially issued on Bitcoin’s blockchain using the Omni Layer Protocol and later issued on the Ethereum blockchain (a Euro version of USDT, EURT was also issued) by Tether Limited. It is the most liquid stablecoin at the time of writing.
You can redeem USDT directly 1:1 with USD on the Tether.to platform. However, there is a fee on fiat deposits and withdrawals.
USDT has been the centre of controversy several times in the past.
– During the 2017 Bitcoin rally, there was an accusation that Tether was manipulating Bitcoin prices by ‘printing’ USDT. Large amounts of USDT by Tether Ltd sent to Bitfinex (an exchange with the same CEO) drove prices higher.
– A Bloomberg’s report in June 2018 suggests that the price of USDT was manipulated by wash-trading on Kraken (exchange). Analysts observations of oddly specific order sizes happening frequently (likely by trading bots) and small orders implies moving the price as much as big orders.
– In October 2018, there were rumors suggesting Noble Bank, Tether’s partner, was insolvent. Many worried Tether did not have sufficient USD to back its stablecoin. This resulted in a sharp dip in USDT’s price and continued to trade at discount for more than 2 months.
At the time of writing, USDT leads all stablecoins in 24-hour trading volume at $3.9b.
TrueUSD (TUSD)
The developers behind TUSD (an ERC20 token) is TrustToken. Upon completing KYC, anyone can wire USD to TrustToken’s third-party partners and receive TUSD through smart contracts. So to redeem TUSD, the process is simply in reverse and they burn the tokens.
A third party auditor regularly checks the status of the funds.. The latest attestation shows TrustToken has sufficient funds to cover the TUSD circulating supply.
Unlike other stablecoins, TUSD has no direct relationship with exchanges and thus has no conflict of interest.
Besides the above, other major fiat-backed stablecoins include USD Coin (USDC), Paxos Standard (PAX) and Gemini dollar (GUSD) which are all ERC20 tokens. The NYDFS (New York State Department of Financial Services) regulates GUSD and PAX.
Crypto-backed Stablecoins
Dai
MakerDAO is the creator, Dai stablecoin is an ERC20 token that has a peg to the USD. The Dai system is decentralized as there is no centralized body backing its value. Thus, there is no need for a trust to escrow funds. Users can borrow Dai using ETH as collateral through smart contracts (collateralized debt position). To retrieve the ETH, one simply needs to return the borrowed Dai.
Dai’s decentralized system’s design maintains the value of Dai to 1 USD.
- If the price of Dai falls below 1 USD, CDP owners have incentive to purchase Dai and close their CDP position (pay off the loan in Dai) at a discount. The increase in demand will drive the price of Dai back to 1 USD.
- If the price of Dai is above 1 USD, there are incentives for ETH owners to create CDP and sell the Dai on the market.
Conclusion
In conclusion, many see stablecoins as a digital version of fiat currency. They provide the below benefits:
- Quick and low-cost transactions
- Utilizing dApps and smart contracts
- Protecting holders of the volatile price movements in the crypto market.
Most stablecoins centralize their system and require trust in the issuing body. When this trust is broken we see huge price swings and failure to maintain a peg (e.g. Nubits and BitUSD).
If you found this article helpful, don’t forget to subscribe to our newsletter below and checkout some of our other content:
Newsletter
Metexit! Social Token Platform Rally Hires Facebook Crypto Executive
Metexit! Facebook, now Meta, has seen an executive exodus with an executive at its cryptocurrency division leaving the company. Rob Collier, former head of consumer
Crypto Fed Put? Jerome Powell Targets Interest Rate Hikes Next Year
United States Federal Reserve chair Jerome Powell opens the door to interest rate hikes next year. Also, Powell is not concerned about cryptocurrencies disrupting financial
Meme Coin King Returns! Elon Musk: Tesla Will Accept Dogecoin As Payment
Elon Musk, Time’s Person of the Year for 2021, has his carmaker Tesla start accepting meme coin Dogecoin. Customers can use the meme-based cryptocurrency to
Blockchain, Not Bitcoin? Wells Fargo, HSBC Settle FX Transactions With Blockchain
Blockchain yes, bitcoin no? HSBC and Wall Street bank Wells Fargo announce a blockchain solution for the foreign exchange (FX) settlement. The two banks will
Bitcoin as Legal Tender? Free Bitcoin Airdrop? Indian PM Modi Suffers Another Twitter Hack
Is India accepting bitcoin as legal tender? A free bitcoin airdrop to all residents? Just a fake tweet from India Prime Minister Narendra Modi’s twitter
WhatsApp Launches Crypto-powered Payments Novi In The US
WhatsApp ventures into instant cryptocurrency payments, launching a trial in the US as a first step. Would it be a welcoming signal from the US
