Main
- 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 different sources, assets as collateral and value retention mechanisms.
- There is no single classification of stablcoins, but researchers divide projects based on criteria such as issuer centralization, reserve rate, asset class as collateral and others.
What are stabelcoins for?
Popular stabelcoins are a liquid asset: they are abundant 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, stabelcoins are a safeguard against volatility in a cryptocurrency portfolio and are actively used in DeFi applications.
What are some popular stablecoins?
There are hundreds of stablecoins on the cryptocurrency market. Here’s a list of the top 10 stabelcoins based on capitalization size (CoinMarketCap data as of August 2022):
- Tether (USDT);
- USD Coin (USDC);
- Binance USD (BUSD);
- Dai (DAI);
- TrueUSD (TUSD);
- Pax Dollar (USDP);
- USDD (USDD);
- Neutrino USD (USDN);
- Fei USD (FEI);
- Gemini Dollar (GUSD).
What assets are stabelcoins tied to?
In the crypto-industry, the most common staplecoins are those that are tied to the price of the dollar. The most famous example of this 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.
Some Stablecoins can be pegged to the price of fiat currency, but use it to collateralize the cryptocurrency. In this case, the stability of the token price is achieved through overreservation or a clever arbitrage algorithm. The most famous example of a stabelcoin with cryptocurrency reserves is DAI from MakerDAO.
You can also buy staplecoins tied to the price of gold – in particular, PAX Gold (PAXG) and Tether Gold (XAUT). Unlike traditional gold-based instruments, such as ETFs, staplecoin issuers do not charge management fees, and cryptocurrency settlements are faster and cheaper. However, such coins are not very popular.
What are the differences between stabelcoins?
Each stabelcoin has its own system that provides its value. There is no generally accepted classification of stablecoins, but in general they can be distinguished from each other by a few basic criteria:
- The class of asset in reserve – fiat or cryptocurrency.
- Reserve rate. Reserves can cover a fraction of the value of all tokens of a particular Stablecoin in circulation, but also meet or even exceed it;
- The method of price retention – either reserves only (applies mostly to centralized projects), or reserves and algorithm (this approach is used in algorithmic stablcoins).
What are centralized stablcoins and who manages them?
Most popular stablcoins are issued by centralized issuers. Each of them manages a fund which holds reserves of various assets and securities. The fund is regularly independently audited to verify that the stated size and composition of the fund is consistent with the actual fund.
Tether, which manages the largest USDT staple by capitalization, publishes the results of such reports on its website. According to the August 2022 audit, Tether’s reserves consist of U.S. Treasury bills, cash, commercial paper and foreign exchange market funds.
The accounts of the issuer of BUSD, a stablecoin pegged to the U.S. dollar, which is issued by the Binance exchange, are similarly audited.
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 operates in New York State.
Centralized Stablecoin is issued solely by its issuer – 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 stablcoins are very stable because 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, the Crypto Capital defendant pleaded guilty to all counts, including a charge of “shadow banking.”
What are algorithmic stablecoins?
Cryptocurrencies, rather than traditional instruments, provide stability for some stablecoins.
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.
What kind of algorithmic stackcoins are there?
One way to ensure the stability of an algorithmic stablcoin is through over-reservation, where the amount of collateral exceeds the value of the entire token issue. The most popular such steablecoin is DAI. It is a cryptocurrency that can be issued by any user using the MakerDAO protocol.
At the same time, he is obliged to block his cryptocurrencies as collateral, the value of which in dollar equivalent is more than 100% of the amount of DAI tokens issued in exchange. This is necessary to avoid losing full collateral in the event of a sharp drop in the price of cryptocurrencies. If the ratio of collateral to the issued amount of coins falls below the norm, there is a forced liquidation of the user’s position.
DAI is a really stable coin, but its obvious disadvantage is low capital efficiency due to too high collateral.
The creators of some stabelcoins do not control the issue – any user can issue them. The price is regulated by the actions of economic agents, not the actions of a centralized organization. Stability in this case is provided by an additional crypto-asset, which guarantees the liquidity of the stablcoin.
The most popular algorithmic stablcoin was UST from the Terra project. Its price is held through holder arbitrage, that is, through a supply and demand mechanism. The asset that secured UST’s price was the project’s native coin called LUNA.
For a long time, UST was the largest algorithmic Stablecoin, but in the spring of 2022, as a result of a series of events, it lost its peg to the dollar, after which the entire project effectively ceased to exist.
Other unusual price-holding models include Ampleforth (AMPL), Fei USD (FEI), Frax Finance (FRAX) and Magic Internet Money (MIM).
How will Stablecoin evolve?
After the failure of Terra, the cryptocurrency market, with few exceptions, has lost confidence in algorithmic stackcoins. The main successful project in this direction can be called DAI from MakerDAO.
Centralized projects such as Tethere and USDC remain major players in the stablcoin segment. However, a number of states, including the United States and the European Union, plan to impose extensive regulation on stablecoin issuers, which could complicate their use.
Stablecoins are regularly criticized by regulators and government agencies. In late 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 converting them into fiat.