Why Can Stablecoins Thrive in a Bear Market?
As a medium of crypto asset exchange, stablecoins play an instrumental role in the crypto sphere. According to CoinMarketCap’s latest statistics, the total market cap of stablecoins has surpassed $180 billion. The steep rise of stablecoins’ market cap is a testimony of how dynamic the cryptocurrency trading market is and what a critical role stablecoins play in it. Today, Truly will give you a brief introduction to stablecoins and dive deeper into the popular decentralized stablecoins dominating the market now so that you can jump on the bandwagon and earn high returns!
What are stablecoins? Are there different types of stablecoins?
Literally speaking, stablecoins are one type of cryptocurrency that features stable value. Pegged to an asset at a stable ratio, stablecoins are immune to price swings within a short time frame and can therefore keep their price relatively stable.
Stablecoins can be divided into centralized ones and decentralized ones. Centralized stablecoins include those pegged to the US dollar, such as USDT, USDC, and TUSD. There are of course stablecoins pegged to other fiat currencies. For instance, stablecoin issuer TrustToken issued a series of TrueCurrency, including THKD, which is pegged to the Hong Kong dollar, and TGBP, which is pegged to the British pound.
How can centralized stablecoins remain stable?
Take TUSD as an example. If users want to obtain 1 TUSD on its official website, they will have to pay 1 USD, and if they burn 1 TUSD (namely sending 1 TUSD to the designated burn address), they will receive 1 USD in return. Every TUSD is backed by a USD held in reserve. Users can mint TUSD and redeem USD at a 1:1 ratio on the TrueUSD website anytime. The TUSD price in the secondary market would fluctuate slightly due to changes in the market supply-demand ratio, but not too much. Arbitragers can gain profits through our redemption mechanism: they would buy TUSD once its price falls below 1 USD, because they know they can always redeem it at 1 USD on the TrueUSD website. On the contrary, if the TUSD price is above 1 USD, traders would buy TUSD on the TrueUSD website and sell it on the exchange to earn the spread until it falls back to 1 USD.
How can decentralized stablecoins remain stable?
Decentralized stablecoins remain stable in their value through over-collateralized minting or algorithm protocol, mainly including DAI and FRAX.
Cryptos are known to be highly volatile in price, and none of the mainstream fiat currencies can be traded directly against cryptos. This is when stablecoins come into play. By pegging their value to fiat currency, stablecoins manage to maintain price stability and bridge cryptos and fiat money, thus knocking down the blocks between the two and facilitating value exchange.
Who are the up-and-comers in decentralized stablecoins? And what are their pros and cons?
According to Footprint Analytics, centralized stablecoins remain the biggest contributor to stablecoins’ overall market cap, with USDT alone taking up half the total. The leader of decentralized stablecoins, DAI, secured the fourth spot, followed by the algorithm stablecoin UST. The growth slowdown of centralized stablecoins has made room for more and more “up-and-comers” in this field, predominated by decentralized stablecoins.
Stablecoin market cap (source: Footprint Analytics)
Next up, Truly will walk you through three of the most popular decentralized stablecoins recently: UST, FRAX, and MIM. Read on to learn more about these “dark horses”!
Algorithmic stablecoin: UST (TerraUSD)
TerraUSD is a scalable, yield-bearing, and decentralized stablecoin that supports multiple blockchains. Latest metrics on CoinMarketCap reveal that the market cap of TerraUSD has reached $14 billion, outperforming the established collateralized stablecoin DAI, which has a $9 billion market cap.
TerraUSD is an algorithmic stablecoin, where the cost of minting equals the face value of the stablecoin minted. In order to mint 1 TerraUSD, $1 worth of TerraUSD’s reserve asset (LUNA) should be burned. TerraUSD adopts an infinitely-scalable monetary policy, which helps DeFi apps and protocols achieve their full potential without restrictions.
On the upside, TerraUSD allows efficient use of funds as it taps into an algorithm to adjust the supply and demand, thus impacting the token price. On the flip side, its price swings are substantial.
Algorithmic stablecoin: FRAX
FRAX is the first fractional-algorithmic stablecoin protocol. It is open-source, permissionless, and entirely on-chain — currently implemented on Ethereum and other chains. The end goal of the FRAX protocol is to provide a highly scalable, decentralized algorithmic currency to substitute fixed-supply digital assets like BTC.
FRAX can be minted and redeemed at $1 from its system, allowing arbitragers to balance the demand and supply of FRAX in the open market. FRAX currently has a market cap of $2.9 billion. Like other algorithmic stablecoins, it allows efficient use of funds, but is highly volatile.
Over-collateralized stablecoin: MIM (Magic Internet Money)
Abracadabra is a multi-chain stablecoin lending protocol available on Ethereum, Binance Smart Chain (BSC), Fantom, Avalanche, and Arbitrum. It uses interest-bearing tokens (ibTKNs) as collateral to borrow a USD pegged stablecoin — Magic Internet Money (MIM). As of now, the market cap of Magic Internet Money (MIM) has exceeded $1.9 billion. Similar to DAI in terms of stabilization mechanism, the cost of capital of MIM is regulated through the minting rate to influence the supply and demand for MIM’s currency. However, the low utilization rate of funds remains a pain point to be addressed for overcollateralized stablecoins.
The stablecoin market will continue to grow along with the rapid expansion of DeFi applications. Centralized stablecoins, pegged to fiat currencies, will inevitably be subject to regulations, providing another clue to the impetus behind decentralized stablecoins. However, prevailing stablecoins such as algorithmic stablecoin and over-collateralized stablecoin also face a myriad of challenges like unstable prices and low levels of capital utilization. Despite these challenges, Truly believes that with the development of innovative blockchain technologies and the expanding breadth of use cases for the DeFi ecosystem, stablecoins that meet market needs will serve as the building blocks and indispensable components of the future crypto market.
Websites referred to in this article:
Footprint Analytics: Stablecoin-Market Share of Market Cap — Footprint Analytics