What Are Stablecoins?
Cryptocurrencies are one of the most talked-about industries in 2021. It is believed that this is the currency of the future since it gives its owner not only more freedom but also allows you to build up capital well. What is a stablecoin and how is it different from other cryptocurrencies? While Bitcoin does have very large fluctuations in price, stablecoin creates assets from fiat currencies or commodities to make it more stable. Many people believe that this particular type of currency will be very popular.
Definition of Stablecoin
Many people who have invested in cryptocurrencies have already regretted it since the value of the currency is changing very rapidly. Usually, people like it when they know how much their asset will be worth in a week, but for popular cryptocurrencies, this is a real luxury. Sometimes the cost can change rapidly, even within one day.
What are stablecoins? It is a separate type of cryptocurrency tied to a different asset class to stabilize the price. When such a currency is created, an asset is created in fiat currency or goods. The larger it is, the fewer price fluctuations.
Unlike conventional cryptocurrencies, where the value depends on the state of the crypto market, a stable coin depends on the fluctuations of the currency or assets to which they are tied. That is why when creating stablecoin, only those assets are used, the value of which practically does not change or there is a steady trend towards a price increase.
Most often, they try to tie stablecoins to fiat or various goods. Fiat is the national currency that we are used to using in everyday life, for example, the dollar or the euro. By commodities, we mean gold or other precious metals or stones, sometimes oil (but the coronavirus pandemic has shown that oil is not the best solution, as its prices can also fluctuate a lot). The most popular of the entire list is gold. Its value often only grows, in this case, the value of the cryptocurrency will grow.
There are also bitcoin stable coins - this is a more complex type of cryptocurrency, which is not tied to fiat, but another cryptocurrency. Such a solution is quite rare, since it is quite difficult to implement it, it does not help to solve the problem with price fluctuations.
Regardless of what the cryptocurrency is backed by, the method of application does not change. So, as before, you can make financial transfers between international companies, create deposits, make purchases, add to business development, and much more.
Main Types of Stablecoin Collateral
The idea of a coin stem seemed quite interesting to the creators of cryptocurrencies, so they developed several options for their provision. Among the most demanded:
- Fiat currencies. The most popular type of collateral for stablecoin. Typically, the US dollar is used for this, but there are several exceptions. So, BiLira becomes attached to the Turkish lira.
- Jewelry. At the moment, the cost of precious metals and stones changes very little, so some cryptocurrency creators are tied specifically to gold, silver, or even diamonds.
- Cryptocurrencies. Among the most famous cryptocurrencies used to stabilize is Ethereum. Its fluctuations are not as strong as that of Bitcoin.
- Other investments. Some cryptocurrencies prefer to stabilize through commercial papers, various algorithms, and other assets.
Stablecoin cryptocurrency tries to tie itself to the most stable assets. In addition, the type of cryptocurrency that is pegged to the dollar or other fiat currency has an easier way to convert.
The larger a stablecoin asset, the more reliable it is. As a result, some cryptocurrencies are investing huge amounts of money. So let's try to track:
- Tether - 68,7 billion USD;
- USD Coin - 30,4 billion USD;
- Binance USD - 13,5 billion USD;
- Dai - 6,3 billion USD;
- TerraUSD - 2,7 billion USD.
These are some of the most sought-after stable coins on the market. The interest in them is huge. Even though their value about the US dollar is relatively low, they demonstrate quite good indicators.
For more recent data on each cryptocurrency, you can head over to the CoinDesk news site. Here, all information is updated as quickly as possible, presented in an accessible language.
What are The Most Popular Stable Coins?
The Stablecoin list is really extensive today. Let's talk about the most popular and interesting ones.
Tether is the first stablecoin, which appeared back in 2014 and until today it is the most demanded and popular. It has the largest capital that continues to grow. Originally pegged to the dollar 1: 1, but active today looking for another way. So, in 2021, the company said that almost half of its reserves are in commercial paper, which is a form of short positions. It does not disclose the issuers of this document, but claims they all have an A-2 rating or higher (A-2 is the second-best rating available to a corporate borrower from credit rating agencies such as Standard & Poor's).
The main way to use USDT is to move between exchanges. So, it becomes possible to earn extra money on the difference between the value of assets on different sites.
Recently, another way to make money on stablecoins has appeared. So, when transporting large consignments of goods between China and Russia, it is much more profitable to pay through Tether. This allows you to avoid the regulation of large financial transactions by the Chinese authorities and avoid unnecessary taxes.
Tether also gained additional notoriety due to a lawsuit by the Attorney General of New York. The case was settled in February this year when the company was required to pay 18,5 million USD and provide reports on its work over the next two years.
USD Coin was founded in 2018 by two well-known cryptocurrency companies Circle and Coinbase through the Center consortium. This stable coin is pegged to the US dollar and currently has an asset of over 30 billion USD. At the last presentation, the owners of the company said that they plan to increase this figure to 190 billion USD by 2023.
Cryptocurrency is developing rapidly and can create good competition for others.
Dai is an unusual stablecoin that was founded in 2015 based on the Ethereum blockchain. It is pegged to the US dollar but backed by Ether, the token behind Ethereum.
Unlike other cryptocurrencies, Dai is decentralized, and all the necessary projects are implemented by Ethereum smart contracts. The code rules cannot be changed, making this cryptocurrency one of the most secure in the world.
This system has one major drawback. The technology of smart contracts requires improvement, they do not always work as expected, as a result, in 2020, they led to 8 million USD in losses. It is quite difficult to control the workflow of smart contracts without changing the source code.
Diem is a stablecoin that is still in development but has already made a splash. It is launched by the world-famous social networking site Facebook.
Some governments, and more than others in China, are now examining their digital currencies, which are as similar to cryptocurrencies as possible, to create worthy competition.
Initially, the developers planned to launch one cryptocurrency, which will be supported by two fiat currencies at once. But they faced serious technical problems in implementing this idea, so they decided to create several cryptocurrencies based on euro, dollar, and francs. So, the Diem dollar was supposed to be released in January 2021, but so far this has not happened.
Disadvantages of Stablecoins
At first glance, stable cryptocurrency has a huge number of advantages and should bypass Bitcoin and Ethereum for a long time, but this has not happened yet. This is large because they have several disadvantages:
- Reserves must be kept with a bank or other financial institution;
- There is a question of whether there are enough assets to buy out all units of the cryptocurrency;
- Authorities are allowed the ability to intervene in transactions.
Initially, cryptocurrencies were created to avoid intermediaries, but the existence of a stablecoin without such parties is simply impossible. This results in counterparty risk.
Tether has been frequently asked lately if the organization has the collateral that it claims? It becomes quite difficult to verify this information. So, there is always a possibility that if all users enter at the same time to exchange their assets for US dollars, then there may simply not be enough money for all.
In addition, a cryptocurrency such as USD Coin has a black button that can block accounts if it becomes clear that the money was obtained illegally.
Thus, at the request of US law enforcement agencies, a stablecoin for $ 100,000 was frozen.
Since the interest in cryptocurrencies is growing rapidly, there is a possibility that all of the above disadvantages will be solved with the help of new technologies.
Stable coins appeared in 2014 and changed the world's perception of cryptocurrencies. This technology allows you to avoid sharp fluctuations in the value of assets and helps to create confidence in the future.
Despite the clear advantage of stablecoins, they also have their drawbacks, which fundamentally contradict the goal of creating cryptocurrencies, this is the reason why Tether, USD Coin, Binance USD cannot overtake other cryptocurrencies in popularity. It is assumed that in the future, developers will be able to cope with existing problems.