All You Need to Know About Stablecoins in 2020
Stablecoins are like a bridge between two spaces: the space of crypto and fiat currencies. Pegged to a reserve asset, they are supposed to merge the best of both worlds and make the ‘perfect’ money — secure, private, and stable.
What Stablecoins Are
Bitcoin is volatile. In a matter of hours, it can easily drop or spike by ten percent and nobody, at least those slightly familiar with crypto, will be too surprised. We’ve seen the coin’s price jump to 20k and fall to 6k in less than a year. Although it does make it a great asset for speculations and other money-making activities, it is not suitable for use as a payment method, and holding money that we cannot spend is only good for some time.
In turn, fiat currencies are controlled by the banks. Depending on the economic level of the country, the authorized institutions make sure that the price of the national currency doesn’t fluctuate much. And also, fiat money is normally pegged to an underlying asset, be it gold or reserves.
With crypto, everything’s different. There are no authorities and no underlying assets to provide stability, and these are two aspects that ‘real’ money should possess. Unless it is a stablecoin.
So what exactly are they pegged to?
There are three main types of stablecoins: backed by fiat, backed by crypto, and algorithmic ones.
The easiest solution is to have a fiat currency reserve to back the stablecoin. Besides the most popular USD collaterals, stablecoins can have physical reserves in Euro, precious metals, diamonds, oil. These reserves are regularly audited by third-parties (at least, they should be) so nothing gets out of control.
Using another cryptocurrency as collateral is a bit risky. That’s why the crypto collateral is usually sufficiently higher than that of fiat. Sometimes, it makes sense to reserve twice as much crypto or use it along with the fiat reserve to ensure some kind of safety.
The most mysterious category of stablecoins, non-collateralized, doesn’t depend on reserves. Alternatively, it uses another stability factor and acts as a central authority. Thanks to the algorithms and smart contracts, new tokens are automatically burned or issued to protect the price from volatility. Basically, it is the same as banks printing out notes to support their national currency in times of uncertainty.
This comes as no surprise that stablecoins have been popular for a while. In fact, according to a Coinbase report, the market cap of nine major stablecoins combined has recently reached $9 billion. One of the most recognized stablecoins, Tether, at the moment of writing boasts a $6.3 billion market cap.
Tether is the largest (by market cap) stablecoin on the crypto market
So why are they so popular? Non-volatile stablecoins are easily accessible to anyone with an internet connection, technologically advanced, programmable, and fast. Right after the markets started crashing, people went crazy with buying stablecoins. And when the economy is in crisis, people rush to search for a safe haven. And in the crypto space, stablecoins are considered to be the most reliable way to hold your money if you want to save it from dramatic drops.
Stablecoins are also a good solution for the countries that can be found in neverending economic crises. Take, for example, Venezuela. While fighting hyperinflation and a shaky political situation, the country made an attempt to issue its own stablecoin. And other countries around the globe are thinking about it too. Even Facebook was about to launch its own stablecoin Libra.
Of course, there is a place for critique. Some people say stablecoins lack transparency. Others doubt that stablecoins are truly decentralized since a lot of them depend on USD and other assets. And there are those who don’t appreciate stablecoins because they lack volatility and thus there is no way to make money on them.
In reality, stablecoins are all different. They use different approaches and some of them are more centralized than the others.
Here are some of the most popular stablecoins.
Tether is currently the biggest (by market cap) stablecoin in the crypto space. It is said to be backed by both fiat and cash and supports USD, Euro, and Chinese yuan (CNH).
Also, it has been criticized for its connection with a crypto exchange Bitfinex, unclear audits, and manipulating Bitcoin’s price. However, these allegations don’t seem to have had a significant impact on the coin’s performance as the demand for it keeps growing.
DAI by MakerDAO
Multi-collateral DAI is the only stablecoin that is one hundred percent decentralized. In Maker’s ecosystem, there is no central authority and the MKR (Maker’s governance token) holders are the ones who make decisions.
Also, DAI is not a hard-pegged coin. As the creators of the coin put it themselves, stability is achieved thanks to a combination of external market forces, additional internal economic incentives, and other tools controlled by MKR token holders. Read more about Maker’s stability mechanism in a previous article.
USD Coin USDC
Brought to users by Coinbase and Circle, USDC is another Ethereum-based, pegged-to-USD stablecoin. Coinbase assures that its USD reserves are constantly being monitored and audited. And if you keep your USDC on the above-mentioned exchange, you’ll get rewards.
Paxos Standard PAX
“The most liquid regulated stablecoin”, PAX is also pegged to the US Dollar. The coin was created to put an end to international transaction fees, as well as to move between crypto assets. In the future, creators of PAX hope that the coin will become a medium of exchange, and people will use it to pay for goods and services.
Binance didn’t miss out on the chance to issue its own stablecoin too. To bring this idea to fruition, the exchange partnered with Paxos and provided a discounted trading fee to all BUSD holders. Unlike many other stablecoins, Binance Coin has gone beyond the ERC20 standard and migrated to its own mainnet.
Another stablecoin worth mentioning is EURS by Stasis. Pegged to the Euro, the coin is supported by various liquidity providers, custodians, exchanges, and payment platforms. Besides escaping volatility, EURS allows instant payments, fast and cheap cross-border transactions, and provides access to stable currency to anyone who needs it.
Zero Fee Stablecoin Exchange in Lumi
Thinking of transferring some of your crypto to a safer store of value? We’ve got a great offer for you! Lumi Wallet has recently added an option to exchange crypto to crypto inside your wallet with zero commission fees.
This means that you can easily exchange all the Ethereum-based stablecoins, including Tether, DAI, EURS, PAX, and others without paying any fee, bypass the volatility and still keep your crypto holdings safe.
Stablecoins might be controversial, but that’s just part of the reality of the modern cryptocurrency space. We need time and new developments to raise the level of adoption.
One thing is certain: stablecoins do bring value to the ecosystem. They combine the best from the stable world of fiat and progressive tech of blockchain. And based on the concept and performance of certain stablecoins, we can see that decentralization is also achievable.
Originally published at https://blog.lumiwallet.com on May 6, 2020.