15 June 2020
While digital currencies are yet to reach mainstream adoption, one part of the crypto market that has achieved massive growth is Stablecoins. This new invention continues to grow in popularity as it comes with solutions to the wild volatility issues that initially threatened to cripple the crypto sphere.
In this article, we shall explore what Stablecoins are, the pros and cons, major players, and how they differ from first-generation cryptocurrencies.
Let’s dive in:
WHAT ARE STABLECOINS?
Stablecoins are a class of cryptocurrencies that are backed by physical assets. The coins can be backed by fiat currencies, precious metals, other cryptocurrencies, or a combination of the three. That said, there are generally three types of Stablecoins:
- FIAT-BACKED STABLECOINS
This is the most popular type of Stablecoins. They are backed by fiat currency with a 1:1 ratio. This means that for every Stablecoin, there is real fiat currency in the bank.
Fiat-backed Stablecoins are highly centralized because they are launched and governed by a central organization. The organization can be a bank, company, or even a government.
Examples of Fiat-backed Stablecoins include Tether (USDT), USD Coin (USDC), and Gemini USD (GUSD).
- CRYPTO-BACKED STABLECOINS
Crypto-backed Stablecoins are Stablecoins backed by other digital currencies. The coins are much more decentralized than their fiat-backed counterparts because all operations are done on the blockchain.
Crypto-backed Stablecoins are often over-collateralized to avoid problems with liquidity in times of extreme price fluctuations of cryptocurrencies.
Examples of Crypto-backed Stablcoins include MakerDAO and Havven.
- COMMODITY-COLLATERALIZED STABLECOINS
Just as the name suggests, commodity-collateralized Stablecoins are backed by common commodities such as oil, real estate, gold, among other precious metals.
Anyone in possession of commodity-backed Stablecoins essentially holds a tangible asset that can appreciate in value over time.
Advantages Of Stablecoins
Stablecoins offer stability in a highly unstable market. They offer investors a safer investment option in the crypto market. With increased stability, everyday people and investors are more likely to jump into the crypto market. The more people participate in the market, the more the market grows.
- BORDERLESS PAYMENTS
Like traditional cryptocurrencies, Stablecoins can be sent anywhere in the world via the internet. Blockchain makes it possible for people to transact with Stablecoins with no regard for location, banks, or other intermediaries.
- FASTER TRANSACTIONS
Eliminating the need for intermediaries makes using Stablecoins faster and cheaper. There are no intermediary fees to be paid and no waiting periods. As soon as a transaction is made, it takes minutes, if not seconds, for the funds to hit the receiver’s account.
- SECURE TRANSACTIONS
Because all transactions take place in the blockchain, Stablecoins enjoy the security features that come with the decentralized network. Blockchain makes Stablecoins secure and tamperproof.
Disadvantages Of Stablecoins
Fiat-backed Stablecoins are highly centralized, which is counter-indicative of the very nature of cryptocurrencies. The coins’ reliance on third parties to operate defeats the whole idea of a decentralized system.
Regulations come into play when third parties, such as banks, got involved in the cryptospace. Fiat-backed Stablescoins that need banks to operate usher in regulations to the highly unregulated ecosystem.
- TETHER (USDT)
Ever since it was first launched in 2014, Tether has grown to become one of the most popular and dominant Stablecoins in the crypto market. The Stablecoin is backed by the US dollar and is issued by Tether Limited, which is closely associated with Bitfinex exchange.
Tether USDT has a market cap of more than $ 8 billion.
- USD COIN (USDC)
USD Coin is another popular Stablecoin launched by the Coinbase crypto exchange and Circle. The Stablecoin is powered by Ethereum blockchain and is backed 1:1 to the US Dollar. The fiat currency is held on bank accounts.
USD Coin has a market cap of more than $700 million.
- TRUE USD (TUSD)
True USD is an ERC-20 based Stablecoin that is pegged to the US Dollar at a 1:1 ratio. The Stablecoin is issued by TrustToken and is supported by more than 70 exchanges around the world.
TrustToken, the platform behind True USD Stablecoins, has partnered with registered fiduciaries and banks to store the funds backing True USD tokens.
True USD has a market cap of more than $ 100 million.
Unlike the previously mentioned Stablecoins, DAI is highly decentralized. It is not governed or issued by a central authority.
Though backed by the US Dollar at a 1:1 ratio, DAI is governed by a decentralized community of MKR token holders. These token holders control the Maker Protocol, which is the smart contract behind the DAI Stablecoin.
The decentralized nature of DAI makes it more transparent and fair than the centralized Stabecoins. The coin is also immutable and censorship-resistant.
DAI has a market cap of more than $100 million.
How Do Stablecoins Differ From Bitcoin/Ethereum
Stablecoins differ from conventional cryptocurrencies such as Bitcoin and Ethereum due to their general design. Stablecoins are asset-backed while conventional cryptos such as Bitcoin are not. While the value of Bitcoin can change at any time, the value of Stablecoins is far less volatile.
Bitcoin’s value is tied to supply and demand. If more people are into the coin, its value shoots up. If not, its value goes down. This makes it highly volatile and unpredictable.
Stablecoins, on the other hand, have their value tied to the assets backing them up. For example, fiat-backed Stablecoins backed by the US Dollar will remain a dollar a unit regardless of the market behavior.
All said and done, there’s no doubt that Stablecoins are the answer to the volatility inherent in traditional cryptocurrencies. However, since this a new invention, it’s too early to determine its success. What’s more, there is a myriad of emerging Stablecoin projects out there that will have to try out these new concepts to see what works and what doesn’t.