What Are Stablecoins?
Stablecoins can be easily classified as the third wave of digital assets in the cryptocurrency market. Five years after bitcoin was launched, followed by altcoins, the first digital asset of its kind, Tether (USDT), was classified as a “stablecoin” and launched in 2014. The stablecoin soon became one of the top-ranked digital assets by market cap, and crypto enthusiasts could now invest in an entirely new asset class: digital currencies that are backed by and pegged to a fiat value.
After Tether, many new dev teams emerged with new ideas for stablecoins, developing the concept further as stablecoins grew in popularity year to year. What exactly are stablecoins, and what are some of the top stablecoins in the market?
What Are Stablecoins?
After the original cryptocurrency, bitcoin, and the class of coins that followed, known as altcoins, the power of blockchain technology brought a new class of digital assets: stablecoins. As the name suggests, stablecoins intend to offer stability in a market where assets are traded under high volatility and are susceptible to frequent and radical price rises and drops. Backed by reserve assets, stablecoins offer stability in a still-maturing market of digital assets.
The rising popularity of stablecoins is due to the fact that these assets offer the best of the fiat and crypto worlds. Thanks to the functionality of blockchain technology, stablecoins can facilitate instant processing, security, privacy, and low fees, depending on the project. On the other hand, stablecoins channel low volatility and high stability in valuation, which is characteristic of fiat currencies.
Stablecoins are defined by their attempt to back their market value with a fiat currency or a commodity. The value stability (market price) is achieved through collateralisation; stablecoins may be pegged to a fiat currency such as the US dollar or EUR or commodities such as gold. Otherwise, the low volatility and high stability of stablecoins are achieved through an algorithmic mechanism designed to buy and sell derivatives or reference assets. By developing such a mechanism and backing these digital assets with fiat and fixed value, the price of stablecoins remains immune to sudden and radical price swings.
While traders and investors use bitcoin and other digital currencies to make a profit from price swings or transfer monetary value across the blockchain, stablecoins are usually used as an alternative way of making fast and cost-effective fiat deposits. This use is particularly handy on exchanges where there is no option to exchange fiat for cryptocurrency.
Several types of stablecoins have been developed since the issuance of Tether (USDT).
Types of Stablecoins
There are two basic types of stablecoins in the market: collateralised and hybrid. Collateralized can be split into four subgroups: fiat-backed, crypto-backed, asset-backed, and non-collateralised.
USDT is the first stablecoin ever to be issued, and this digital asset represents a fiat-backed stablecoin. Fiat-backed stablecoins are pegged to a fiat value, such as fiat currency or reserves. The reserves backing the crypto represent the total market cap of the stablecoin. While many fiat-backed stablecoins are pegged to a single fiat currency, some could, in theory, be backed by a group of national currencies, such as Facebook’s libra, which is still in development.
As the name transparently states, crypto-backed stablecoins are backed by a cryptocurrency. These stablecoins use protocols to assure that the price doesn’t fluctuate with the crypto used to back the token. One of the best and most successful examples of crypto-backed stablecoins is DAI. Although significantly less popular than fiat-backed stablecoins, some projects, such as DAI, are pushing this concept to the front of the crypto-verse.
Asset-backed stablecoins are usually pegged to the underlying value of backing assets that are not necessarily fiat currencies or crypto. These stablecoins are not used to exchange value. Rather, the idea is to invest in its underlying value, such as oil or gold, without physically owning these assets. That being said, asset-backed stablecoins provide a title of ownership.
Non-collateralised stablecoins are also known as algorithmic stablecoins. These assets don’t have an underlying asset. They are similar to fiat currencies issued by central banks in the sense that the value will decrease or increase in relation to supply and demand. The main difference between fiat and non-collateralised stablecoins is the way these assets are issued. With fiat currencies, central banks determine the supply. With stablecoins, the supply is determined by an algorithm. The supply can also be determined by a decentralised mechanism in which governance of the supply is managed by votes.
Top Stablecoins on the Market
Issued by the company Tether Limited, USDT is one of the most popular stablecoins, in addition to being the first stablecoin ever issued and developed. Tether is pegged to the US dollar and is backed by the currency in a 1:1 ratio.
The US dollar is not the only national currency backing USDT; Tether converts euros and Chinese yuan into digital cash, as well. Reserves include cash and cash equivalents.
The stablecoin runs on the blockchain, providing daily updates on the value of USDT. The team guarantees that the value of USDT will always be equal to or greater than the supply.
USDT is certainly one of the top-traded digital assets on the market, as well as one of the most popular stablecoins, because it is a fast and safe way to digitise monetary value.
USDT is supported on three different networks: Omni, ERC-20 standard on the Ethereum network, and Tron. Tokens.net offers full support for ERC-20 standard USDT operations on the exchange.
USD Coin (USDC)
USD coin is pegged to the US dollar and represents its digital equivalent. The stablecoin is governed by the Center, which is a consortium in charge of setting policy and technical and financial standards. The consortium managing USDC is membership-based and offers full value transparency in the spirit of blockchain.
USDC allows users to make fast, reliable, transparent, and cost-effective payments. The stablecoin is issued by regulated financial institutions, and the team promises 100% US-dollar-backed reserves for USDC that can always be redeemed for US dollars in a 1:1 ratio.
USDC can be used to earn interest on top lending platforms, used against volatility, to secure holding, and to complete fast transactions.
TrueUSD (TUSD) is fully collateralised and backed by the US dollar in a 1:1 ratio. Every TUSD can be fully exchanged for US dollars, where one TUSD is worth one USD. TUSD is highly accessible and available across five continents and over 160 markets and 70 exchanges.
The stablecoin guarantees 1,000-times faster and cheaper transactions than traditional financial systems. Balances can be checked on Etherscan because TUSD represents the ERC-20 token standard and operates on the Ethereum blockchain.
TrustToken also issues TrueCAD, TrueHKD, TrueGBP, and TrueAUD, offering a basket of national currencies for fast and secure payments, as well as establishing and proving ownership and control over assets such as bonds, rental properties, timeshares, stocks, small businesses, movies, books, TV shows, music, and patents.
Maker’s DAI is perhaps the best example of a crypto-backed stablecoin. DAI is also pegged to the US dollar, where the value of one DAI equals one USD. Maker uses a system of collateral managed by Maker holders. The entire system operates on the Ethereum blockchain, and Maker uses smart contracts to back DAI stablecoins to the US dollar.
Technically, each 100 DAI is backed by 1.5 Ether as collateral. Holders may also earn DAI by locking DAI units at a savings rate determined by the Maker community. Because the protocol is powered by smart contracts, Maker (MKR) holders govern the network, and DAI is getting more popular as an alternative way of holding and transferring value.
Over 400 services and apps have integrated DAI so far, including games, wallets, and DeFi platforms. DAI is a consumer-grade stablecoin, which means that anyone can use it anywhere.
Paxos Standard (PAX)
Paxos standard (PAX) is one of the rare stablecoins that has legal features. PAX is approved and regulated by the New York State Department of Financial Services and can be instantly redeemed for US dollars. PAX is pegged to the US dollar, where every PAX unit equals one USD.
The stablecoin is issued by Paxos Trust Company and is backed by the company’s reserves. PAX can be used for instant trading, peer-to-peer transactions, paying for products and services, and safe and stable holding. PAX can be found on over 150 exchanges, wallets, and OTC markets, and users can access monthly audit reports. PAX is one of the handiest, fastest, and safest ways to digitise monetary value.
Gemini Dollar (GUSD)
Gemini dollar (GUSD) is another regulated stablecoin. The stablecoin is issued by one of the largest exchanges in the US cryptocurrency market, Gemini, and is fully backed by the US dollar in a 1:1 ratio.
GUSD was created to enable safe digitisation of fiat currency. It enables fast transactions and holding without the risk of high volatility common in the crypto market. Users who wish to get the best from their digital assets without the risk of declining prices can take advantage of GUSD instant transfers and safe storage for digital money.
Gemini dollar operates on the Ethereum blockchain as an ERC-20 token standard and can also be used as a tool against inflation for volatile currencies. Gemini dollar is said to be the “first regulated stablecoin” approved by the New York State Department of Financial Services.
STASIS EURO (EURS)
STASIS EURO (EURS) is pegged to the euro with a 1:1 ratio. EURS supports the value of the euro on the blockchain with supported liquidity by Stasis partners to assure that all EURS units are backed by the euro, 1:1.
EURS is held on custodial reserve accounts. The stablecoin is backed by liquidity providers, custodians, payment platforms, exchanges, and other partners, and it can also be exchanged for securities.
EURS rests on the Ethereum blockchain and represents EIP-20 standard token. At the same time, EURS is also the first stablecoin on the Ethereum blockchain to introduce delegated payments. Users can choose to use EURS to pay for transaction fees instead of GAS. STASIS Wallet users can use other supported currencies to pay transaction fees.
EURS is used as a hedging solution, used for cross-border transactions and instant payments, and a great choice as a tool against inflation.