What Are Stablecoins?
1. What are stabelcoins for?
2. What are the popular stabelcoins?
3. What assets are stabelcoins tied to?
4. What are the mechanisms that support the price of stabelcoins?
5. What are centralized stabelcoins?
6. What are the advantages and disadvantages of centralized stablcoins?
7. What are algorithmic stablecoins?
8. How will stabelcoins evolve?
The main thing about stabelcoins
- Stablecoins are cryptocurrencies with a fixed or stable exchange rate.
- They are a universal unit of account, convenient for trading, storing capital and protecting an investment portfolio from cryptocurrency volatility.
- Stable coins can have a variety of sources and assets as collateral.
- The most popular types of stablecoins are centralized and algorithmic, each with its own advantages and disadvantages.
What are stabelcoins for?
Popular Stablecoins are a liquid asset: they are available in large quantities on almost any platform.
Popular Stablecoins are also a universal unit of exchange and capital storage among crypto investors and traders. They are easier to trade in pairs with other cryptocurrencies than with fiat currencies. Unlike fiat, staplecoins are faster and easier to transfer between accounts and addresses.
In addition, staplecoins are a safeguard against volatility in a cryptocurrency portfolio and are actively used in DeFi applications.
What are the popular stabelcoins?
There are hundreds of stable coins on the cryptocurrency market. Here’s a list of the top 10 stabelcoins based on capitalization size (CoinMarketCap data as of May 2022):
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- TerraUSD (UST)
- Dai (DAI)
- TrueUSD (TUSD)
- Pax Dollar (USDP)
- Fei USD (FEI)
- USDD (USDD)
- Magic Internet Money (MIM)
What assets are stabelcoins tied to?
In the crypto-industry, the most widespread are stabelcoins that are tied to the price of the dollar. The most famous example of such coin is Tether (USDT). 1 USDT is equal to $1 and has minimal deviations from this price.
There are stable cryptocurrencies based on other currencies, such as Euro – Stasis Euro (EURS), or based on the Singapore dollar – XSGD.
You can also buy stabelcoins tied to the price of gold – in particular, PAX Gold (PAXG) and Tether Gold (XAUT). Unlike traditional gold-based instruments, such as ETFs, stablcoin issuers do not charge management fees, and cryptocurrency settlements are faster and cheaper.
What are the mechanisms that support the price of stabelcoins?
Each stablcoin has its own system that supports its value, but in general, there are several types that can be distinguished. Mainly, stablecoins differ in two criteria: the class of assets in reserve, the reserve rate, and the way the price is held.
What are centralized stabelcoins?
Most popular stackablecoins are issued by centralized issuers. Each of them manages a fund which holds reserves of various assets and securities. The fund is regularly audited to verify that the stated size and composition of the fund is consistent with the actual fund.
Tether publishes the results of these reports on its website. There, it also presents the current composition of the reserves. As of early May, about 85% of the fund was in cash and commercial paper.
Stablecoin operators are entities incorporated in a major jurisdiction. The second most capitalized dollar-stablecoin, USDC, is run by a consortium of U.S. companies Circle and Coinbase. It controls reserves, mostly consisting of cash and short-term U.S. government bonds. The company that manages the BUSD coin reserves is based in New York State.
The issuer of centralized stablcoin is responsible for its issuance – it increases or decreases the circulation of the coin depending on the amount of reserves in the collateral.
What are the advantages and disadvantages of centralized stablcoins?
On the one hand, centralized staplecoins are very stable, as their price is 100% secured by assets with low volatility. In addition, they are liquid, meaning they are available on almost any cryptocurrency trading platform. Also, popular stabelcoins are convenient for mutual settlements and capital storage. They are convenient to place as a base currency in trading pairs on cryptocurrency exchanges.
On the other hand, centralization is a weakness of such coins. Any difficulties with the organization controlling the reserves, including claims from regulators and reporting manipulation, could cause problems for all Stablecoin holders. In addition, it is unclear exactly how a stablecoin operator might use reserves.
A prime example is USDT. In early 2019, the New York State Attorney’s Office charged the Bitfinex exchange with using the capital of its affiliate Tether to compensate for its own loss of user funds. It was about $850 million, access to which the platform lost after their transfer to the Panamanian processing service Crypto Capital.
Bitfinex only repaid the main debt to Tether in early 2021 and soon settled the conflict with the authorities. At the same time, Tether was sued by investors, accusing the company of “illegal and deceptive” practices. In April 2022, defendant Crypto Capital pleaded guilty to all counts, including a charge of “shadow banking.”
What are algorithmic stablecoins?
Cryptocurrencies, rather than traditional instruments, provide stability for some stable coins. Since the value of digital assets can fluctuate dramatically, ensuring 100% value becomes a challenge. One way to solve it is to implement a decentralized management system, as well as a special computer algorithm that maintains the value of the asset based on certain principles.
How will stabelcoins evolve?
Stablecoins are regularly criticized by regulators and government agencies.
At the end of 2021, the U.S. Treasury Department issued a report on the risks of stablecoins, noting the opacity of their reserves and assessing them as a threat to investors. The Fed believes stablecoins pose a risk because of possible problems with their conversion into fiat. Incidents such as the UST depreciation will likely only accelerate the introduction of stricter regulation of stablcoins.
Tether Chief Technology Officer Paolo Ardoino believes that algorithmic stablcoins are dangerous for the cryptocurrency market because they can cause a “cascading effect.