How Stablecoins Work and What to Do with Them

Stablecoins are a unique form of cryptocurrency that is designed to maintain a consistent value by being linked to the value of another stable asset. Unlike other digital currencies, stablecoins are linked to the value of stable assets, such as fiat currencies or precious metals, which helps to maintain their value and reduce price volatility.

Individuals residing in countries with unstable monetary systems can also benefit from stablecoins as they provide a stable and accessible decentralized digital currency. Additionally, investors can use stablecoins as a hedge against potential drops in their cryptocurrency’s value.

Stablecoins can serve as a decentralized digital currency that is both stable and easily accessible, which is especially advantageous for individuals residing in countries with unstable monetary systems and limited capital controls. Additionally, investors who anticipate a drop in their cryptocurrency’s value can transfer their holdings to stablecoins as a hedge.

There are currently four main types of stablecoins available on the market, including traditional asset-backed, cryptocurrency asset-backed, and non-collateralized stablecoins.

Traditional asset-backed

Stablecoins backed by fiat currencies, such as the US Dollar, use a reserve of that currency as collateral. Other types of collateral used for stablecoins include precious metals like platinum or silver and commodities such as corn or oil. However, the majority of fiat-backed stablecoins are collateralized by US dollar reserves. An independent custodian manages these reserves and is audited regularly to ensure compliance with reserve requirements.

Crypto-backed

Cryptocurrency-backed stablecoins are collateralized by cryptocurrencies rather than fiat currencies. To address the increased volatility of crypto-backed stablecoins, they usually maintain an overcollateralized position. This means that even if the value of the cryptocurrencies backing the coin declines significantly, the stablecoin will still hold its intended value, typically $1.

To achieve this, the stablecoin will issue a much lower supply against the reserve as compared to fiat-backed currencies.

Algorithmic (Non-Collateralized)

Non-collateralized stablecoins are those that do not involve the use of any reserve asset. Instead, their stability is derived from a working mechanism, such as that of a central bank.

The term “algorithm” can be confusing, but it simply refers to a set of instructions that govern a process. In the context of crypto, an algorithm refers to pieces of code on the blockchain, encoded in a set of smart contracts.

Algorithmic stablecoins typically rely on two tokens: one stablecoin and another cryptocurrency that backs the stablecoin. The algorithm, or smart contract, regulates the relationship between these two tokens. Like all assets in the market, including houses and stocks, cryptocurrencies, including stablecoins, fluctuate in price based on market demand and supply.

To prevent a stablecoin from de-pegging from its intended value of $1 due to market conditions, algorithms regulate supply and demand. If there is too much demand for an asset but little supply, its price increases, and vice versa. The algorithm’s goal is to keep the stablecoin’s price in check, However, it is important to note that algorithms can sometimes fail and cause significant problems, such as the UST de-pegged incident. Another algorithmic stable which is USDD — having controversy right now.

Hybrid

These stablecoins incorporate features of both collateralization and algorithmic rules. For example, FRAX.

How Can Stablecoins Be Used?

Stablecoins have multiple use cases, including:

Store of value

Stablecoins are designed to maintain a stable value, making them a suitable option for storing value in cryptocurrency.

Medium of exchange

As stablecoins are pegged to an asset such as the USD, they offer a way to bridge the gap between fiat and cryptocurrencies by minimizing volatility.

Trading

Stablecoins are often used by traders to quickly cash in and out of cryptocurrency investments without having to pay high fiat on-ramp or off-ramp fees. For example, Tether (USDT) is frequently used on major exchanges for trading.

Liquidity Providing

Investors can also use stablecoins on decentralized exchanges (DEXs) as a liquidity provider for pairs that include a stablecoin. In return, they earn a share of the fees charged for facilitating trades between the pair.

Lending

One of the most significant uses for stablecoins is the ability to earn high yields on deposits through various DeFi protocols. Users can deposit stablecoins onto a DeFi lending platform, which then lends them out to borrowers with interest. The depositor earns a portion of that interest charged for providing funds.

Payments

Stablecoins offer fast and efficient cross-border payment options without the need for centralized financial intermediaries.

Top Five Stablecoins right now:

USDT (Tether)

Tether (USDT) is a stablecoin that has gained recognition as the most prominent in the market. The coin is backed by a reserve of actual US dollars held off-chain in a secure location controlled by a centralized third party, which ensures the coin’s value remains constant. The reserve is believed to be held in a bank vault, and each tether is trusted to be worth one dollar. Tether currently accounts for a significant 48% of all cryptocurrency trading volume. However, Tether Ltd, the company responsible for producing Tether tokens, has not provided conclusive evidence that the currency is fully backed by the stated reserve. This has led to doubts among investors about the coin’s legitimacy.

USDC (USD Coin)

USDC is a stablecoin developed by Circle and overseen by the Centre Consortium, consisting of Circle and Coinbase. It is a stablecoin that is fully reserved and maintains a 1:1 peg with the U.S. dollar. This means that for every digital USDC dollar in circulation, there is a corresponding 100% cash and U.S. treasuries backing, making it redeemable for an actual U.S. dollar. To ensure the safety and management of the USDC reserves, they are held by trusted U.S. financial institutions like BlackRock and BNY Mellon. Several major exchanges, including Binance, Coinbase, Gemini, Kraken, and Poloniex, have adopted USDC as a replacement for U.S. dollars.

USDC maintains transparency and accountability by providing monthly attestations confirming that the reserve amount is greater than the amount in circulation. These attestations follow the guidelines set by the American Institute of Certified Public Accountants (AICPA) to ensure credibility.

Circle, the company behind USDC, operates as a licensed money transmitter under U.S. state law, similar to PayPal, Stripe, and Apple Pay. Circle undergoes annual financial audits and SEC reviews to ensure compliance with regulations and transparency.

USDC distinguishes itself from other stablecoins in three critical ways. Firstly, it has set up protective measures to handle potential government investigations and emphasizes transparency. Secondly, unlike other stablecoins, USDC is entirely backed by fiat collateral, making it independent of the future value or worth of other cryptocurrencies. Lastly, USDC issuance is regulated and supervised under U.S. state money transmission laws, and Circle’s operations undergo continuous scrutiny.

USDC’s value proposition lies in its complete backing by cash and U.S. Treasuries, making it an ideal asset for financial institutions to hold without any concerns about price fluctuations. This development is a significant milestone for the crypto market as it allows regulated institutions to offer crypto products without worrying about the risk of volatility.

Recently, USDC held approximately 8% of its total reserves, about 3.3 billion, in Silicon Valley Bank (SVB). The collapse of SVB on March 10, 2023, caused fear, uncertainty, and doubt (FUD) among the crypto community regarding USDC’s de-pegging and panic selling, leading to a drop in USDC’s price to around $0.90. Following a turbulent weekend for the crypto market, USDC issuer Circle announced that it had lost its dollar peg. However, Circle also stated that its reserves are safe and that it is moving on to a new banking partner, Cross River Bank.

BUSD

Paxos and BUSD are stablecoins that have received complete approval and regulation from the New York State Department of Financial Services, offering the highest level of consumer protection. This regulatory oversight assures users that their funds are held in a safe and transparent manner, building trust among the community.

BUSD is a stablecoin issued by Paxos in partnership with Binance, and its value is pegged to the US dollar. Each BUSD token is fully backed by one US dollar held in reserve, making it a stable option for traders and investors looking for an alternative to the volatility of other cryptocurrencies.

Starting February 21st, Paxos has ceased creating new BUSD tokens as per NYDFS regulations. However, Paxos Trust, a regulated institution overseen by the NYDFS and audited by a top-four accounting firm, will continue managing the dollar reserves that back BUSD tokens. These reserves are fully segregated and held in bankruptcy remote accounts, ensuring that all BUSD tokens issued by Paxos Trust will remain backed by US dollar-denominated reserves on a 1:1 basis.

DAI

Dai is a decentralized stablecoin operating on the Ethereum blockchain via the MakerDAO protocol. It was launched in 2015 and is pegged to the US dollar, with Ethereum serving as its backing. Unlike other stablecoins, Dai isn’t governed by any central authority, but by immutable Ethereum smart contracts. This unique approach offers increased transparency and decentralization but also poses potential risks. In 2020, the MakerDAO protocol was hacked, leading to a loss of $8 million and emphasizing the need for better risk management and security measures.

TUSD

TrueUSD is a stablecoin that is backed by the US dollar, with a one-to-one redemption policy, and is regulated to provide greater transparency and security. The platform offers other stablecoins, including TGBP, TCAD, and TAUD, that are backed by third-party accounting firms that provide monthly attestations. TrueUSD can be transferred worldwide for a fee of $0.01, subject to KYC/AML checks.

To enhance transparency, TrueCoin has launched a “live attestation” dashboard created by Armanino, a leading US accounting firm. This dashboard offers third-party confirmation, and TrueCoin is the premier client. TrueUSD holders can monitor a real-time dashboard of their accounts, giving them advanced transparency.

One of the key features of TrueUSD is the ability to easily purchase and use the digital token, which can be freely converted back into the primary currency. TrueUSD cooperates with TrustToken, a platform for developing asset-backed tokens that can be bought and sold globally, to improve functions, compliance, banking, consumer experience, marketing, engineering, and liquidity support to ensure higher standards.

Stake your USDC with Flynt

The USDC GMX:GLP strategy is a non-directional trading method that aims to keep delta neutrality. The strategy utilizes the liquidity pool available on the decentralized futures trading exchange GMX and employs short selling to mitigate any directional bias. Traders on GMX can leverage up to 50x in the GLP liquidity pool to execute trades. With most traders experience losses, GLP has generated high returns consistently for over two years. It is worth mentioning that although unsubscriptions are possible weekly, optimal performance of this strategy is generally observed over a period longer than three months.

Strategy & Backtest Result

The strategy has been backtested for approximately Setting C has been implemented for the live strategy based on several backtests on various rebalancing strategies. This approach resulted in an average annual return of 18.96% with a maximum drawdown of -3.5%.

Compared to the GLP+fees strategy ‘Setting C’ looks like it tamed the volatility quite nicely.

Proof of Funds

Flynt always prioritizes managing your USDC effectively and we strive to maintain transparency in our operations.

Arbitrum Address: 0x34b352b6584eA08fdAf531048bef3d67EB44F08E
Strategy: https://flynt.finance/strategies/USDC-GMX:GLP

Risk
This strategy aims to be as close to delta-neutral as possible, but due to fluctuations in price of the GLP assets the strategy may be exposed to the underlying delta. We rely on external service providers including Ethereum, Arbitrum, GMX and centralized exchanges such as Binance. In order to hedge, margin is used, but due to the low level of leverage there is low risk of liquidation. There are also risks involving wBTC and the safety of its peg. Flynt Finance reserves the right to withdraw from the strategy considering the market conditions.

Conclusion on stablecoins

Stablecoins were designed to maintain a stable value, so buying them will not generate any investment returns. Nevertheless, the value of stablecoins, such as USDC, lies in their practicality rather than their potential price appreciation.

Stablecoin’s unique features make it an attractive option for both individuals and businesses, enabling them to transfer money rapidly, securely, and cost-effectively without relying on banks or intermediaries. These benefits make USDC a practical solution that can save users both time and money. For those who are interested in stablecoins available on market now, you may visit https://stablecoins.wtf/