What is a stablecoin ?
Stablecoins are all the rage right now, with a total capitalization of around $200 billion. This falls into the top 3 largest cryptocurrency capitalizations behind Ethereum at $300 billion. The third largest capitalization goes to the most reputable stablecoin: USDT ($80 billion).
A stablecoin is a cryptocurrency backed by a reserve of fiat currency, a commodity or another cryptocurrency.
To understand this type of crypto, it is actually an asset that has been put in the form of a token, on the blockchain. The stablecoin facilitates access to a blockchain and its cryptocurrency ecosystem by facilitating the exchange of values with lower risk.
As the name suggests, stablecoins are meant to be “stable”. This stability, they owe it to their nature: they are the only crypto-assets that are backed by a strong and reputable safe haven such as the US dollar or gold.
There are different types of stablecoins :
- The stablecoin backed by a fiat currency, such as the dollar. These cryptocurrencies follow the course of the dollar. So owning a dollar-backed stablecoin is like owning a dollar (ex: USDT)
- The gold-backed stablecoin. Each gold-backed stablecoin type crypto-asset guarantees its own price per ounce of gold. The owners of these stablecoins own fractions of gold held by the banks that own this precious metal backed by the stablecoin (ex: PAXG)
- Stablecoins backed by another cryptocurrency. These stablecoins are a central part of decentralized finance (DeFi). They hedge a second currency to maintain a consistent market price. It is a protection against excessive price fluctuations (ex: DAI)
What are stablecoins used for ?
Now that we know what a stablecoin is, let’s see what their uses are.
The first usefulness of a stablecoin goes without saying! It is a stable cryptocurrency; it is therefore not subject to the sometimes (too) rapid fluctuations of the cryptocurrency market.
Thus, this reassures investors, who, in the event of a bear market, can transform their assets into stablecoins in the snap of their fingers and thus have in their possession an asset on the blockchain as stable as a fiat currency.
The exchange rate of a stablecoin should always be 1 to 1 between the coin and the fiat currency it is backed by.
In addition, a stable cryptocurrency allows you to take advantage of the staking returns offered by major exchanges such as Binance, without incurring the costs of a volatile currency that could plummet.
Many investors own USDT in a staking pool, allowing them to have annual returns of 6, 8, or even 10%.
Accumulation of interest is one of the main motivators for investors to own stablecoin. They can thus benefit from the accumulated interest on stable tokens and optimize their investment.
It should be noted that, despite the rapid growth of cryptos, some concerns about the volatility of crypto-assets persist. Stablecoins thus meet the need for a solution that bridges the gap between fiat money and cryptocurrencies.
Finally, contrary to the nature of the blockchain itself, stablecoins are regulated by the organization that controls their liquidity.
For example, USDT is controlled and governed by Tether, unlike Bitcoin which is a decentralized asset.
It is possible that before learning about stablecoins, you were reluctant to own cryptocurrencies, because you could not be sure to withdraw or secure your Bitcoins in the event of a crash. However, now that you know that there are reliable and secure cryptos available at the price of the dollar, maybe you will change your mind!
How do these cryptocurrencies stay stable ?
Most stablecoins are regulated by an organization.
Tether, for example, requires a depository to regulate its stablecoin, and it has reserves of dollars that are regularly monitored by the Federal Deposit Insurance Corporation which must publish reports on these organizations.
Thus, the amount of Tether (USDT) stablecoin issued must equal the amount of US dollar held by Tether. This is the principle of gold-dollar parity of the 20th century, but this time, in the blockchain. This makes it possible to avoid price fluctuations and to follow the course of the dollar.
Clearly, for each token of a stablecoin, the organization behind it must hold a unit of the asset on which it is backed. If there is 1000 USDT in circulation, Tether must have 1000 USD in its vaults.
However, there are other stablecoins that retain their stability without having a central body. This is the case of stablecoins backed by cryptocurrencies, such as DAI. They use Smart Contracts – an automated chain of action on the blockchain – to ensure their stability.
Are there any stablecoins backed by the Euro ?
Euro stablecoins exist, but are very rare. The overwhelming majority of stablecoins are backed by the US dollar. There are, however, a few exceptions. Tether, the company behind the largest stablecoin USDT, has launched its EURT equivalent for Euro Tether.
One of the first euro stablecoins remains that of the Casino group (Lugh), available on Coinbase.
The list of stablecoins
Here is the list of the main stablecoins that you can find on the market. This list is not exhaustive. You will only find there the main protagonists of stable cryptos:
USDT (United-States Dollar Tether)
The Tether organism governs the most capitalized stablecoin. USDT is a universal stablecoin backed by the US dollar. It is available on all crypto trading platforms.
USDC : Coinbase stablecoin
USDC, or USD Coin, is a token present on the Ethereum blockchain. It is the stablecoin Coinbase and Circle who have joined forces to create the project.
It is the fourth largest cryptocurrency by capitalization and ranks just behind its colleague USDT. It is a stablecoin highly regarded by investors.
BUSD : Binance stablecoin
BUSD is the Binance stablecoin, one of the most popular exchange platforms. This Binance stablecoin is partnered with Paxos Trust Company, the company behind the physical gold-backed stablecoin.
TUSD is the token of the TrustToken platform. It issues US dollar-backed stablecoins for the Ethereum blockchain. It allows the evolution of the blockchain and its stability like other stablecoins, by operating on Ethereum.
PAXG (Pax Gold)
The PAXG is backed by gold, one unit represents one ounce of gold owned by the Paxos Trust Company and stored in an English reserve.
DAI (Maker Dao)
MakerDAO is one of the cryptocurrency-backed (crypto-collateralized) stablecoins. Maker Dao uses smart contracts to issue DAI. DAI is ubiquitous on popular cryptocurrency exchanges, and in the world of Decentralized Finance.
UST : Terra stablecoin
The UST is perhaps the scariest horror movie of 2022 with considerable downfall. UST is the stablecoin of the Terra project whose main token is LUNA.
The stablecoin depends directly on LUNA and after an attack by a user who massively sold UST and weakened it.