Stablecoin is a stable currency. A general name for cryptocurrencies whose exchange rate is trying to stabilize.
The first stablecoin, Tether, was issued in 2015 by Tether Limited.
Stablecoin is a liquid asset that is available on almost all stock exchanges. Wherever you are in the world, you can transfer stablecoins from platform to platform. Therefore, stablecoin is a universal currency of exchange and capital maintenance for cryptocurrency investors and traders.
Unlike fiat money, stablecoins are easier to transfer between accounts and addresses. In addition, stablecoins are actively used in DeFi applications.
The most popular stablecoins
There are hundreds of stablecoins on the cryptocurrency market. Here’s a list of the most popular ones in 2023, based on capitalization value:
- Tether (USDT).
- USD Coin (USDC).
- Dai (DAI).
- TrueUSD (TUSD).
- Pax Dollar (USDP).
- Gemini Dollar (GUSD).
- USDD (USDD).
- BitUSD (BitUSD).
- USD Digital (USDD).
- Neutrino USD (USDN).
The list is updated from time to time, but Tether always remains in the lead.
What assets are the stablecoins linked to?
The most common stablecoins in the crypto sector are pegged to the price of the dollar. A well-known example of such a currency is Tether (USDT), where 1 USDT equals 1 USD, with a slight deviation from that price.
There are also stablecoins based on other fiat currencies, such as the euro — Stasis Euro (EURS), or based on the Singapore dollar — XSGD.
Some stablecoins can be pegged to the price of the fiat currency, but use cryptography as collateral. In this case, stability is achieved through excess reserves or an intelligent arbitrage algorithm. The best example of a stablecoin with cryptocurrency reserves is MakerDAO’s DAI.
You can also buy stables linked to the price of gold. For example, PAX Gold (PAXG) or Tether Gold (XAUT). Unlike traditional gold-based instruments (e.g. ETFs), stablecoin issuers don’t charge a management fee, and crypto settlements are cheaper. But so far, these coins are not very popular.
Differences between stablecoins
Each stable currency has its own system that supports its value. There is no generally accepted classification of stablecoins, but in general they can be distinguished by criteria:
- Asset class in reserve: fiat currency or cryptocurrency.
- Reserve rate. Reserves can partially cover the price of all stablecoin tokens in circulation, be equal to the price or even exceed it.
- The method of maintaining the price. It can be reserves only (mostly centralized) or reserves and an algorithm (algorithmic stablecoins).
Types of stablecoins
Now let’s take a look at the stables by type of regulation. There are two main types:
- Centralized. Coins are created and controlled by central organizations that guarantee the token’s link to fiat money and maintain its stability.
- Decentralized. Coins work on the basis of blockchain smart contracts and without the intervention of central organizations. These projects use different mechanisms to control the asset: freezing funds, financial obligation mechanisms. This guarantees price stability.
Decentralized stablecoins can be divided into two subspecies: algorithmic and over-collateralized.
Over-collateralized stablecoins maintain their rate at the expense of various liquid cryptocurrencies: ETH, BTC and others. As the dollar price of currencies is volatile, overcollateralization is used: each USD 1 token is backed by USD 1.5 or more in crypto. For example, this is the case with the decentralized stablecoin DAI.
Algorithmic stablecoins have no connection to real assets and provide a link to the dollar through the mechanism of issuing and redeeming their own tokens. For example, Cardano has an algorithmic stablecoin of this type, Djed.
Development prospects for stablecoins
After the failure of Terra, the cryptocurrency market lost confidence in algorithmic stablecoins. But a successful project here can be called MakerDAO’s DAI.
Centralized projects such as Tether and USDC are the main players in the stablecoin segment. But some strong states, including the US and the EU, are planning to introduce extensive regulation of stable token issuers, which may hinder their use.
Stablecoins are often criticized by regulatory bodies. At the end of 2021, for example, the US 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 that stablecoins pose a risk due to possible problems with their conversion into fiat currency.
Advantages of stablecoins
Digital stablecoins have many advantages. We’ll describe the main ones here:
- Stability. Stablecoins perform the same function as the popular fiat currency. For example, if there is increased volatility in the market, a traditional investor can transfer part of the assets in the portfolio to cash or treasury bills, while at the same time, a cryptocurrency investor can switch to stablecoins.
- A fast means of trading. If you have stablecoins, then with strong market volatility, you can easily make a trade. They are easy to buy or transfer due to fast transaction processing and low commissions. Whereas you can’t handle a fiat currency as quickly. What it costs to take the currency out of the bank.
- Increased liquidity. Stablecoins increase liquidity and volumes in the cryptocurrency market. Their stability increases credibility in the crypto market, as more and more people are ready to work with them. The increase in the number of market participants increases market capitalization and trading volume, which leads to greater liquidity. This ensures higher asset prices and a narrower spread between supply and demand.
- Pay anywhere. Stablecoins can be transferred anywhere in the world, including sending them to places where it is difficult to buy US dollars or where the local currency is unstable.
Disadvantages of stablecoins
Stablecoins have one disadvantage – the risk of centralization. Some coins have a centralized management and reserve structure, which creates certain risks for users. If problems start on the part of the stablecoin issuer, the weakening of reputation can cause damage to investors.
Conclusion
Stablecoins, in the world of cryptocurrencies, are a very efficient currency: devoid of the risks associated with high volatility, with the possibility of “sitting it out” in difficult times. And you can also earn interest on fluctuations or bets. The digital currency market is constantly developing and, not to please the regulators, continues to grow. The outlook for stablecoins is therefore very favorable.
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