What Are Stablecoins?
What Are Stablecoins?
Stable Coin

What Are Stablecoins?

By Guest post - 6 Nov 2022

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Cryptocurrencies today are known for their enormous price volatility. Prices can show large price fluctuations in a short time. It regularly happens that the crypto market as a whole falls or rises with double digits. 

This is a major drawback for some investors. In addition, this ensures that the use of crypto in everyday life can be somewhat problematic. For example, if you deposit BTC at a non GamStop casino, and the price of the coin drops suddenly, you will have less money to play with. However, there is also a type of cryptocurrency that does not suffer from this; stablecoins.

Stablecoins are cryptocurrencies that try to ensure price stability and are tied to a reserve of assets. Usually this is the US dollar, but there are some variations on this. In this way, cryptocurrencies can combine the best of the traditional markets with the best of the world of crypto. 

What Stablecoins Are There?

There are a large number of different stablecoins. One thing they all have in common is the fact that they are linked to the value of an underlying asset.

Stablecoins can be divided into a few categories. The first type are stablecoins that are pegged to fiat currencies such as the US dollar and are fully backed by a reserve of this fiat currency. A well-known example of such a coin is Binance USD (BUSD). 

There are also stablecoins that are not linked to fiat currencies, but a different type of asset. There are stablecoins whose value is linked to commodities such as silver, gold and even real estate. An example of this is Tether Gold (XAUT). This stablecoin is directly linked to the gold price.

There are even stablecoins that are pegged to the price of other cryptocurrencies such as ethereum (ETH) or bitcoin (BTC). At first glance, it seems just as easy to buy the underlying cryptocurrency. However, such stablecoins make exposure to the pegged crypto less risky through a clever trick. For example, they only spend $500 in new coins for every $2,000 they have in their reserves. This ensures that the stablecoin remains more stable than the linked cryptocurrency.

Finally, there are cryptocurrencies that are backed by a large amount of different investments that are intended to keep the price stable. The best-known example of such a stablecoin is Tether (USDT). Originally Tether was backed 1-to-1 by a dollar reserve, but as time went on, a variety of investments were added to it. For example, a large part of Tether’s reserves consists of tradable securities.

Why Should You Use Stablecoins?

Using stablecoins brings some great benefits. First of all, stablecoins use blazing fast blockchain technology. In this way it is possible to make payments in an extremely short time compared to, for example, a traditional bank transaction.

In addition, stablecoins do not look at national borders. It is just as easy to send a stablecoin transaction to someone abroad as it is domestically. Because blockchain technology is used, the system is also very transparent. Every transaction is stored on the blockchain and can be viewed by anyone.

Of course, the stability of stablecoins is a big advantage. Perhaps this is even the main reason for using stablecoins. It is still quite difficult to use cryptocurrencies in everyday life. Due to the high volatility, the prices of the largest cryptocurrencies sometimes fluctuate extremely. 

If you want to do your shopping, it is of course inconvenient if the bitcoin price suddenly plummets. This problem does not exist when using stablecoins. Thus, the use of stablecoins in everyday payments can offer an excellent opportunity.

What Is the Best Stablecoin?

Although in principle all stablecoins have a number of things in common, the differences between the coins are often large. The way they operate may be different, one may have a little more focus on privacy and the other is fully covered 1-to-1 by US dollars. Therefore, some of the most commonly used stablecoins will be discussed here.

Tether (USDT) is the largest and most widely used stablecoin. The price of tether is linked to the exchange rate of the US dollar. However, tether does not have a homogeneous reserve of dollars. Instead, Tether has quite a spread out portfolio of investments used to back the stablecoin. Tether is by far the largest in terms of market capitalization.

USD Coin (USDC) is another major stablecoin. This stablecoin is issued by the American cryptocurrency exchange Coinbase in partnership with Circle. USD Coin is also pegged to the price of the dollar. Like Tether, USD has more than just dollars in reserve to back the coins in circulation.

Dai (DAI) is another stablecoin whose price is pegged to the dollar, but Dai runs on the Ethereum (ETH) blockchain. In addition, dai does not have dollars as a reserve, but ether tokens. Dai is also a fully decentralized platform. This means that there is no central authority to manage the network, which is the case with, for example, Tether and USD Coin. This is a big advantage for many investors.

Paxos Gold (PAXG) is a stablecoin that, as the name suggests, is not linked to fiat currency, but to the gold price. Paxos manages several vaults in which they keep physical gold in order to cover the value of the PAXG coin. Each PAXG token represents the value of one troy ounce of gold.

1-to-1 Stablecoins

Despite the fact that there are a large number of stablecoins that are pegged to the US dollar, very few actually have their full reserve in dollars. The largest stablecoin, Tether, has received a lot of criticism about this. USD Coin also stated in the past that their reserve consisted of only dollars, until it emerged that this turned out not to be the case at all.

It may be important for investors that stablecoins are actually backed 1-to-1 by the underlying currency. This is because possible problems with the coverage of the coins are kept to a minimum. 

Stablecoins in which the reserve consists entirely of the underlying assets are therefore seen as a safer option by some investors. An example of such a stablecoin is Binance USD (BUSD). This is a stablecoin of the crypto exchange Binance that is again pegged to the dollar and whose reserve consists of US dollars 1-to-1.

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