Top 4 Stablecoins — USDT, BUSD, USDC & DAI
Although there are dozens of different stablecoins, the big four most common ones include USDT, USDC, BUSD & DAI
Stablecoins are something that we can’t be missed out in the crypto industry, with the three most popular dollar-pegged assets being USDT, BUSD & USDC. But MakerDAO’s DAI stablecoin is also extremely important for the crypto ecosystem.
Stablecoins give us can pay each other for services without worrying that the value of our payment will dramatically decrease or increase one day later.
But there are many differences between USDT, BUSD, USDC & DAI, and so we have placed these four popular stablecoins for the full lowdown to help you decide which stablecoin is the best for use in your daily crypto activities? Which stablecoin is more secure?
What is a Stablecoin?
Stablecoins are cryptocurrencies designed to maintain a fixed price, no matter how many coins are bought or sold. They act as an antidote to cryptocurrencies like Bitcoin and Monero, which are very volatile and have a price that constantly changes according to market behavior.
Some stablecoins are centralized projects, so users of these currencies have to trust that the value of these stablecoins is backed 1:1 by reserves held in the accounts of the company that deploys the coin.
Other stablecoins are decentralized and are backed by more novel methods of maintaining a fixed price peg which, crucially, don’t rely on intervention from any kind of centralized company or entity.
Decentralized stablecoins are transparent, meaning that anyone can check on the platform’s block explorer and see exactly how the cryptocurrency is working behind the scenes. Most stablecoins are “pegged” to the US dollar, but as the crypto industry matures, new stablecoins that mirror the price of other government currencies and commodities (Gold, oil, etc) are being brought in.
The Growth of Stablecoins
The use of smart contracts gives rise to stablecoin. Unlike many other currencies, the code in a smart contract helps refine the agreements of a contract to facilitate the transfers, lending, and payment of money seamlessly with limited human intervention.
Still, the primary factor fueling the popularity of stablecoins is their almost negligible volatility as compared to conventional cryptocurrencies. On top of that, industry partnerships also contribute to the growth of stablecoins.
For instance, in a recent corporate move, Visa partnered with Circle, the blockchain maestros behind USDC. Owing to this partnership, Circle corporate cardholders can spend their USDC stablecoin at merchants that accept Visa.
Even better, the U.S. Treasury Office of the Comptroller of the Currency released guidelines for banks to use stablecoins like USDC payments and public blockchains for banking activities.
Thus, federal savings associations and banking channels can now use blockchain for coins like USDC, just like SWIFT transfers or ACH.
The future seems bright for stablecoin holders since the currency may offer a widely accepted payment method to cut costs on data processing and international transfers. Moreover, banks may also use stablecoins to minimize the threat of digital challenges.
Let’s share about USDT, USDC, BUSD & DAI
There are many stablecoins in the cryptocurrency market. The largest by market capitalization are USDT, USDC, BUSD & DAI. The common thing with these stablecoins is that they all track the US dollar. And the USDT, USDC, and BUSD can be categorized as “centralized” stablecoins because their issuer is all by a single entity.
What Is USDT?
USDT (Tether) is a stablecoin pegged to the US dollar at a 1:1 exchange rate. Thus, one USD is equal to one USDT. Buyers can spend, transfer or trade USDT as they would with their regular fiat currency. It is issued by iFinex, the Hong Kong-registered company that also owns the crypto exchange BitFinex in the year 2014.
Tether is in the limelight as the third-biggest cryptocurrency in the world and continues to be the largest stablecoin by market cap, in front of USDC.
USDT was originally built on the Omni Protocol, a software layer built on top of Bitcoin which facilitates the creation and trading of custom crypto assets. The stablecoin then branched out onto Ethereum’s ERC20 network, where it was used widely until high gas fees prompted Tether to further branch out onto more scalable blockchains, such as Tron, Solana, Bitcoin Cash, EOS and Algorand.
The Tether company claims that the price of USDT will always remain at one dollar, as each new coin minted is backed by a dollar-equivalent amount of cash or assets being added to the company reserves.
However, USDT is known to be not transparent about its reserves. In 2019 they claimed every USDT is backed by one dollar in cash held by the company but in 2021, Tether (the company) was fined $41 million by the US Commodity Futures Trading Commission (CFTC). This was due to Tether’s false claims that its USDT Stablecoins are fully backed by real-world fiat money.
Tether has since had an audit in May 2021 and updated their website to include more details about the cash reserves, but what was shocking was that they only hold 2.9% of their reserves in cash back then. However, as of this writing, this number has increased to over 5% in cash and they have been doing monthly transparency reports as well.
What Is USDC?
USDC is another stablecoin with its price pegged to the U.S. dollar. It was created by Circle Internet Financial in 2018 to speed up funds transfer times and reduce volatility associated with Bitcoin and other cryptocurrencies.
As an Ethereum token, USDC can be stored in a wallet compatible with the blockchain. Besides facilitating transfers, USDC also allows users to benefit from higher yields when lending their stablecoins through different decentralized finance applications.
The popularity of the USD coin has increased significantly in the past few years, with a daily average of $2 billion sent through the Ethereum network in March 2021.
USDC also has monthly attestations to prove that they have an equivalent amount of USD backing their USDC to assure investors that they are fully backed.
USDC has since expanded to more networks natively, from Algorand, Avalanche, Solana, Tron, Hedera, Polygon, and more, growing their adoption as crypto becomes multichain.
This simple mechanism keeps the price of USDC stable. USDC is used as a mainstay of the Ethereum DeFi ecosystem, where it can be used to provide stable liquidity on Uniswap, or for lending/borrowing mechanisms on dApps.
What Is BUSD?
Binance and Paxos founded BUSD in 2019 to provide transactions with three important qualities: speed, flexibility and accessibility.
Simply put, Binance USD is a fiat-backed and regulated stablecoin with the same worth as a U.S. dollar. For every Binance USD someone buys, there’s a single dollar held in reserve. As the dollar’s price fluctuates, the stablecoin’s value also rises or falls.
BUSD also offers flexibility in allowing crypto users to quickly turn their holdings into stable assets without moving off the blockchain. Finally, by using BUSD, a user can quickly send money around the globe with nominal fees.
Paxos issues BUSD on the Ethereum blockchain. In addition, Binance offers a Binance-Peg BUSD token on BNB Chain. Binance creates BUSD (BEP-20) by holding BUSD in an Ethereum blockchain address and minting peg BUSD tokens, each of which corresponds to a BUSD token held in reserve by Binance. BUSD (ERC-20) and BUSD (BEP-20) holders can swap their tokens between the blockchains depending on their needs. This can be done on the Binance exchange (when making withdrawals) or through Binance Bridge.
Moreover, Binance USD exists on three blockchains: Binance Smart Chain, Ethereum and Binance Chain. Therefore, BUSD holders can exchange stablecoins between these blockchains per their requirements. BUSD also has monthly attestations to prove that they have an equivalent amount of USD backing their USDC to assure investors that they are fully backed.
DAI Is The Decentralized Stablecoin
One problem that remains for USDC is that the Circle company can, and actually already has, they will freeze the USDC funds on request by law enforcement. Although this may sometimes be desirable on an ethical level, it goes against the ethos of the decentralization of power that pervades the crypto space.
Enter DAI, which is a fully decentralized stablecoin that was launched in December 2017. To understand how DAI works, it’s also important to understand the MakerDAO platform, which was the first decentralized lending platform on Ethereum, and a pioneer of the DeFi movement.
To mint DAI, A trader deposits collateral with MakerDAO. They accept many types of collateral, including coins like ETH, WBTC and BAT.
Once the collateral has been deposited in Maker, the trader can generate a certain amount of DAI. The more collateral a trader deposits, the more DAI they can mint. Traders often use this as a way of HODL assets with good long-term fundamentals (such as Eth) whilst still being able to trade DAI and take advantage of what will hopefully be a booming crypto market.
When locking Ethereum, there is a minimum collateralization ratio of 150%. This means that for every $1 of DAI created, there must be at least $1.50 of collateral (ETH) backing it. However, most traders keep a 300 to 400% collateralization ratio, given how volatile cryptocurrency prices are. If the collateralization ratio drops below 150% the trader’s collateral will be liquidated to pay off their loan.
The DAI loan accrues a small amount of interest the entire time that it’s active, and to close out the loan, the trader must deposit DAI with MakerDAO. There is no limit on the duration of loans, and the MakerDAO platform cannot control what DAI users do with their tokens.
DAI was a revolutionary product when the MakerDAO platform first went live, and as such, there were some teething problems. The Maker community introduced some good solutions to these problems, though, and the DAI peg has stayed consistently around 1 dollar ever since.
Dai has a number of compelling use cases across the crypto ecosystem and is an invaluable tool for savings (that cannot be seized), 24/7 instant international remittance, and financial transparency.
For those reasons, it appears that the DAI stablecoin might be the best bet for the future.
The Uses of Stablecoins
Stablecoins such as USDT, USDC, BUSD & DAI can be used for multiple purposes, such as storing value, accessing yield in the market enabled by blockchain, and payments. Here are some lucrative uses of stablecoins.
Trading Crypto Pairs
Typically, in cryptocurrency, “trending pairs” refer to assets that users can trade for one another through an exchange.
These pairs allow buyers to compare the costs of various digital assets. For instance, a BTC/USDT crypto pair will let you know how many USDT equals one BTC.
When you have stablecoins such as USDC and others in your possession and want to trade them, you can check for the pairing on the exchange. For example, if you have USDC, you may trade with a pairing on the exchange, such as BUSD.
DeFi Protocols for Lending
With DeFi lending, you can lend your stablecoins to a borrower and earn interest. This benefits both borrowers and lenders since users can get loans at much lower rates than if they used decentralized exchanges. Meanwhile, long-term investors can earn interest rates on the coins they lend.
Providing Liquidity
Some of the most popular AMM DEXes include Uniswap on the Ethereum network, generating millions in revenue for liquidity providers passively. However, the downside is that liquidity providers may incur an impermanent loss with their USDC.
The Future of Stablecoins
Due to the fallout of UST affecting thousands of users all over the world, and the lack of transparency in USDT which is the biggest stablecoin in crypto, regulations will likely be a big topic moving forward.
Stablecoins operate outside of the US’s financial system and as they get bigger and more mainstream, policymakers and regulators will pay more attention to them to protect the average joe and prevent systemic risks.
The US federal reserve is also working on offering their own central bank digital currency (CBDC), and other nations are also developing them, and depending on how they view stablecoins, it could affect the entire crypto market in the future. With rising interest rates and high inflation all around the world especially in developing countries, a regulated USD stablecoin is likely to receive a lot of attention and adoption.
After going thru the article, which stablecoin will you choose for your daily crypto activities? Comment and share your thought with us
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