The Best Stablecoins In 2020— Everything You Need To Know
What are you going to do after the Bitcoin bull run? Bitcoin has hit new all-time highs, and you are in the green. But what now? Historically, we have seen that every great Bitcoin Bullrun comes with sharp pullbacks. What are you going to do to secure your profit? If you are faithful to crypto, likely you won’t want to convert to fiat, so what now? You could switch to Altcoins, but that comes with its own inherent risk. Alternatively, you can seek shelter for your funds in stable coins.
What are Stable Coins?
They are digital assets whose main characteristic is stable prices. This is a suitable option for short- and medium-term investors as a unit of account and store of value. A stable coin ties its price to its pegged fiat currency, but you can exchange it freely on a decentralised blockchain. For the first time, it’s now possible to move funds (without significant price volatility risk) outside from the legacy banking system.
However, in the world of crypto, nothing is as it seems, there are several types of stable coins.
Fiat-backed Stable Coins
Fiat-backed stable coins are similar to standard currencies that are pegged to another currency and backed by reserves of Fiat currency. Tether was the first stable coin launched in 2014. The equivalent US Dollar value collateralised it. However, in 2019, Tether shifted from fully collateralise USDT tokens to a combination form of debt owed from within the iFinex group and reserves of USD.
Fiat-backed stable coins rely on the actual backing of reserves. The issuer holds cash (or cash-equivalent assets) into banks or depositories and should periodically provide proofs and accounting records. Unfortunately, Tether failed many times with this regard and that lead to scandals that undermined its reputation.
Tether was the first of its kind, but it is not the only one. Nowadays, many alternatives offer more transparency and accountability. One of the most popular options is USD Coin (USDC) which is backed by reserves held in financial institutions, Cercle. Other major players have recently issued their own stable-coin, Binance and Gemini being among the most notable.
Many critics of Fiat-backed stable coins point to the fact that these coins derive their value from a centralised banking system. This creates potentially significant issues. First, their value may devaluate in the long-term, as unprecedented monetary policies will keep injecting liquidity. At their very root, these coins undermine the principles of cryptocurrencies. Also, their stability depends on the financial institution that holds the reserve, just like the common counter-party risk in financial markets. Finally, the centralised entities that issue these token can seize and freeze assets in response to law enforcement’s requests.
Crypto-Backed Stable Coins
Crypto-backed stable coins are the decentralised evolution of the first versions of stable coins like USDT, USDC and BUSD.
These are stable coins that are backed by crypto. They use a decentralised protocol to prevent the value from fluctuating with the price of the token backing the stable coin. One of the most famous examples of this would be DAI, it is pegged to the value of the US dollar and is backed by collateral of Ethereum tokens.
The system that ensures DAI’s price to align to the price of USD lays in the Maker smart contract. A user can deposits ETH in the smart contract as collateral and receive a loan from that. Once the smart-contract holds the assets, it mints the equivalent USD value in DAI. The algorithm creates and destroys MKR token according to fluctuations in the price of Ethereum, making sure that the price of DAI remains stable.
Despite being less popular than fiat collateralised stable-coins, there are several coins other than DAI. Synthetic has been gaining popularity recently. It uses a similar methodology to DAI to provide collateral to back the value of the synthetic tokens. On top of that, a decentralised oracle guarantees the peg of the price of the token to the underlining asset.
Probably the most promising token that works with this logic is Reserve Protocol. The team has three main steps roadmap for the project.
- The centralised stage — cash reserves held in bank accounts backs the peg of the token to the USD
- the decentralised stage — a basket of digital assets has the role of stabilising the price
- the independent stage — where Reserve abandons the peg to the US dollar. Its price will depend on the assets backing the token. We can call it a real decentralised version of the Libra project!
Asset-Backed Stable Coins
These Cryptos are backed by a reserve of assets that are not fiat currencies. These tokens seek to track the price of other assets, such as gold. They are yet to become more popular. However, the potential they hold is limitless. In the future, more and more assets will go through a process of tokenisation on decentralised blockchains. Tokenisation will enhance the possibility of transfer assets that wouldn’t be easily transferable by nature. Typical examples are precious metals, commodities, real estate and fine works of art.
Some have tried and failed at this endeavour, while others have been successful. One controversial example is Venezuela’s cryptocurrency backed by the country oil reserves. Paxos, other notable company active in the stable-coin business, launched a gold-backed token, Paxos Gold, which is backed by real bullion held in safe vaults.
Asset-backed stable coins are less used as a medium of exchange and more as a way of investing or trading in the underlying asset, without actually having to take physical custody. Furthermore, because asset-backed tokens represent a title of ownership, there may be legal or regulatory implications depending on the jurisdiction.
Non-Collateralized Stable Coins
These are coins that have no underlying asset. They are also known as algorithmic stable coins. They can be somehow defined as a modern and digital version of a central bank.
The role of central banks is to make sure to keep steady, low and controlled inflation in the economy. To do that they increase and reduce the supply of money in the economy to reach their goal. On the other hand, excess of stimulus results in the devaluation of the price of the currency.
At the core of non-collateralised stable coins, there is an algorithm that works as a central bank. Its objective is to keep the price stable over time. To achieve that, it adjusts the supply of tokens, as a means of controlling volatility. The core difference is in whom controls the supply, for fiat currencies it is the central bank, for algorithmic stable coin this is performed by an algorithm or a decentralized model of governance based on holder votes, making the system impartial.
This type of stable coin is currently less well-known than the others described above, but they have the potentials to grow in interest in the future. Recently, Haven Protocol has been under the spotlight due to the long-awaited launch of its private xUSD stable-coin on mainnet. The protocol is a Monero fork and carries its remarkable privacy features. On top of that, it enables a mint-and-burn system to switch between XHV (the native coin of the blockchain) and xUSD (the stable-coin). Transactions happen directly on the Blockchain with no need of counterparty, and the Chainlink oracle guarantees the security of the price feed to prevent malicious behaviours.
Another example of a similar system would be Zigzag.
What stable coin fits your need?
Now that you are familiar with the different types of stable coins, you can begin to decide on which of these you are most likely to use when securing your profits. Other than the type of coin you must take into consideration the trading pairs that are available on the exchange.
The most common stable coin and most frequently used is Tether. You can find market pairs for tether easily on most of the popular exchanges, such as Binance and OKEX. Using stable coins can be valuable to ensure that you secure the profits you have earned and are not adversely affected by price pullbacks that are known to occur historically.
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I am not an analyst or investment advisor. Everything that I provide here site is purely for guidance, informational and educational purposes. All information contained in my post should be independently verified and confirmed. I can’t be found accountable for any loss or damage whatsoever caused in reliance upon such information. Please be aware of the risks involved with trading cryptocurrencies.