Stablecoins – A simple overview

What is Stablecoin?

Stablecoins are cryptocurrencies whose value is pegged to stable (less volatile) financial assets, such as US Dollar, Euro, Gold, etc. for example –

1 USDT (Tether stablecoin) = 1 USD 

The company created stablecoin is responsible to maintain this peg.

Different Types of Stablecoins

There are two main categories of stablecoins.

Centralized Stablecoins

In general, centralized stablecoins backed by Fiat currencies or metals such as Gold. Companies issue new stablecoins and deposit the corresponding balance in banks which can be audited by any third-party auditors. 

Tether(USDT), USD Coin (USDC), Paxos are some of the examples of centralized stablecoins. 

With centralized stablecoins, you need to trust the company issuing these stablecoins to maintain transparency. 

Decentralized Stablecoins

Decentralized stablecoins such as DAI stablecoin manage these pegs using cryptocurrencies (ex- Ethereum) as collateral.

Dai stablecoin is implemented through smart contracts. Therefore anyone can audit these smart contracts to check issued stablecoins and collateral. In addition, decentralized stablecoins are permissionless systems without KYC or any kind of censorship.

How to Buy stablecoin?

You can buy stablecoins on different crypto-exchanges, check out the list of crypto-exchanges.

Best Stablecoins

There are 2 main criteria to select a stablecoins.

  • Transparency 
  • Liquidity 

Transparency — In the case of centralized cryptocurrencies you want an independent firm to frequently audit the company running stablecoin to disclose the maintained reserves in the banks. In the past, incomplete reserves have created problems with one of the largest stablecoin Tether. 

In the case of decentralized stablecoin, there is two most important aspect of transparency. 

  • If the smart contract used to implement stablecoins are properly audited or not by an independent firm? so you can trust it with your assets.
  • Who owns the admin keys of stablecoin’s smart contracts, and are they used responsibly in the past.

Liquidity — Liquidity is one of the most important aspects whenever we talk about any financial asset. Without liquidity, you might not find buyers or sellers for your orders in the market. In addition, low liquidity coins are not widely integrated with third-party exchanges and businesses.

Top Stablecoin list

There are more than 50 stable coins. We are just listing some top stablecoins.

Tether Stablecoin (TUSD)

Tether is a controversial stablecoin that debuted in 2014. Just under 3 months, the company was sold to Bitfinex.

Bitfinex a cryptocurrency exchange that enabled the Tether in 2015 on its exchange. The Bitfinex exchange was accused by the New York Attorney General of using Tether’s funds to cover up $850 million in funds missing since mid-2018.

Coinbase stablecoin (USDC)

Initially created by Circle, the USD coin is promoted by Coinbase. Each USDC is backed by a dollar held in reserve. USD Coin is managed by a consortium called Centre. USDC was first announced in May 2018 by Circle and launched in September 2018.

Dai stablecoin (DAI)

Dai stablecoin is created by MakerDao is a decentralized stablecoin backed by digital assets as collateral. 

Anyone can mint new Dai tokens by providing Ethereum and other digital assets as collateral. 

In addition, anyone can check the current DAI in circulation and collateral ratio because DAI stable coin is a set of smart contracts on Etheruem blockchain. DAI token is governed by Maker Token holders.

Facebook stablecoin libra

Initially, Libra was an independent stablecoin without a peg, backed by a basket of sovereign currencies. However, regulators saw it as a threat to sovereign currencies and didn’t allow it. 

In 2020, Facebook scaled back its ambition with libra and came up with a series of stablecoins each pegged and backed by sovereign national cryptocurrencies. So according to the latest whitepaper, there will be multiple Libra stablecoins such as Libra USD, Libra EURO, etc.

Binance stablecoin (BUSD)

In 2019, the Binance exchange announced a new stablecoin Binance USD(BUSD) in partnership with the Paxos Trust Company.

The Binance stablecoin is backed by U.S. dollars on a 1:1 ratio. You can buy Binance stablecoin from the Binance website.

Stablecoin vs Bitcoin

Bitcoin and stablecoins are two very different assets because of their monetary policy and underlying blockchain. Bitcoin is not pegged to any fiat currency and has a limited supply. There will only be 21 million bitcoins ever. With Bitcoin monetary policy is coded in the software. Above all makes it a unique digital asset govern from its own crypto-economics, unaffected from the government’s monetary policy changes.

On the other hand, stablecoins are pegged to sovereign fiat currencies. The monetary policy of fiat currencies is governed by central banks and there is no limitation on supply. In addition, most of the stablecoins use blockchains like Etheruem, hence their security is directly dependent on Ethereum’s security.

Also Read: Ethereum versus Bitcoin

Conclusion

More than 90% of the money in the world already exists in the digital form. However, stablecoins are a more powerful form of digital asset. 

Stablecoins are borderless, more transparent, and provide better user experience. In addition, integrating stablecoins is very easy for any financial institution and commercial business. 

We think, stablecoins hold the key for crypto adoption and we already seeing more and more business integrating stablecoins.

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